Changes to UK Corporate Governance Code Proposed

The UK’s Combined Code on Corporate Governance would be amended to allow individuals to chair more than one FTSE 100 company at the same time and to allow independent chairs of smaller companies to serve on the company’s audit committee. Currently, the Code provides that all members of the audit committee must be independent non-executive directors. It also states that no individual should be appointed to a second chairmanship of a FTSE 100 company.

Other than those two proposed changes, the Financial Reporting Council concluded that the Code is working reasonably well and there is thus no need for major changes. The FRC is the UK’s independent regulator of corporate reporting and governance. With consultation on the proposed changes starting in November, the FRC expects that the revised Code will take effect in June of 2008. This will be at the same time as new Financial Services Authority listing rules will implement new EU requirements on corporate governance.

While concluding that there is neither need nor demand for a significant overhaul of the Code, FRC chair Sir Christopher Hogg warned that the Code’s flexible comply or explain approach has not always been applied as intended. The chair emphasized that all parties share responsibility for ensuring that the comply or explain regime remains an effective alternative to regulation. For this to be so, he said, companies must provide robust explanations when they choose not to follow the Code; and investors and their advisors must assess each explanation on its merits rather than applying a rigid set of rules. Under the revised 4th EU Company Law Directive, all listed companies will be required to publish annual corporate governance statements, of which the main part will be a comply or explain report.