In April the Financial Reporting Council, an independent regulatory body which seeks to promote good corporate governance and information transparency, published the final draft updates to the  Corporate Governance 2016 Code (hereinafter, “the Code”), which replaces the September 2104 version.

The new Code, applicable to the nearly 900 companies with a Premium Listing on the London Stock Exchange, is an essential guide to applying the highest international standards and is governed by the “comply or explain” principle.

The provisions in the Code are based on the five principles outlined below:

1. LEADERSHIP

The role of the Board of Directors

Companies must be led by an effective Board of Directors that will be responsible for their long term success:

• The board must meet sufficiently often to be able to fulfil its functions effectively.
• The company’s annual report will identify the Chair of the board, the replacement Chair (if one has been appointed), the CEO, the Coordinating Director and the Chairs of the respective committees, together with these committees’ members. The number of meetings held by the board will be disclosed, as well as members’ attendance.
• The company should have professional indemnity insurance for every board member that covers them in the event of legal proceedings.

Division of responsibilities

There must be a clear division of responsibilities between the board of directors and senior management.

• The positions of Chair of the Board and CEO may not be held by the same person, and their responsibilities must be clearly defined.

Chair of the board

The Chair will be responsible for leading the board and for ensuring its effectiveness. The person must meet the independence criteria*.

Non-executive Directors

• The board must appoint, from among its non-executive directors, a coordinating or lead director, to act as direct link between the board and shareholders.
• The Chair of the board must meet the non-executive directors without the executive directors being present. Similarly, the non-executive directors, guided by the lead director, will meet at least once a year to assess the performance of the Chair of the Board.

2. EFFECTIVENESS

Composition of the board

The board and its committees must be appropriately balanced in terms of profiles, experience, independence and knowledge of the company.

• Committee meetings may only be attended by the committee Chair and its members, although other members of the institution may attend as guests.
• The board must identify every non-executive director in the annual report and disclose whether each is independent.
• At least half of the board members, excluding the Chair, must be independent non-executives.

Appointment of board directors

The company must have a formal, rigorous and transparent procedure for appointing directors.

• The appointments committee will drive the director’s appointment process, to support the board. This committee must be formed of a majority of non-executive independent members and chaired by an independent board director.
• Non-executive directors will be appointed for a maximum of 6 years, after which time they may be reappointed following a rigorous review process.
• In a separate section of the annual report, the committee’s activities must be described, including the procedure for appointing directors, the institution’s diversity policy (particularly gender diversity), among others.

Commitments

Board members must dedicate the time necessary to perform their functions effectively.

• To appoint the Chair of the board, the appointments committee must specify the functions to be performed and the time required to carry them out, including the requirement to be available in the event of a crisis. Any other commitments must be disclosed to the board before the appointment can be confirmed, and disclosed in the annual report.
• The terms and conditions for appointing non-executive board directors may be subject to inspection. They must have enough free time to be able to carry out their functions.

Induction and training

All Board members must receive induction sessions when they join the company and regularly update their knowledge and skillset.

• The Chair of the board must ensure that new directors receive these induction sessions, and regularly review their training and development needs.

Information and backup

The board must receive enough information, of an appropriate scope and quality, to enable them to perform their functions correctly.

• Care will be taken that board members, particularly non-executive directors, have access to independent external advice, should they need it, in order to fulfil their roles.
• All board directors will receive the support and services of the Company Secretary.

Evaluation

An annual performance evaluation must be conducted on the board, its committees and its individual board members.

• The outcomes of this evaluation will be published in the annual report.
• In the case of directors of companies listed on the FTSE 350, the evaluation will be conducted with the support of an external firm at least every 3 years.
• Non-executive directors, guided by the lead director, will be in charge of evaluating the Chair, and will take into consideration any input provided by the executive directors.

Reappointment of board directors

All members of the Board may be reappointed at regular intervals.

• Board directors of companies listed on the FTSE 350 must be re-elected every year by the shareholders. All other board directors will be elected during the first Annual General Meeting after their appointment, and may be re-elected for periods each of no more than 3 years.
• Those non-executive directors who have served for more than 9 years should be re-elected every year.

3. ACCOUNTABILITY

Financial reporting

The board must present a fair, balanced and comprehensible evaluation of the company’s financial situation in the annual report. It must also include an explanation of how the company will generate or preserve its value in the long term, and of the strategy that will be employed to achieve its goals.

Risk management and internal control

The board will be responsible for deciding the nature and scope of the main risks it is prepared to assume in order to achieve its strategic goals. It must maintain solid systems for internal control and risk management.

Audit committee and auditors

The board must lay down a formal and transparent procedure for deciding how to apply the financial information report and the information about the internal control and risk management systems, so as to maintain an appropriate relationship with the company auditors.  

It must also set up an audit committee that has at least 3 non-executive independent board directors. In the case of small companies, it may be set up with a minimum of 2 independent members, including the Chair, but the latter may not be the Chair of this committee.

One of the audit committee’s areas of responsibility will be as the key decision maker on the appointment, re-election or dismissal of the company’s external auditor.

4. REMUNERATION

Level and components of remuneration

The remuneration of executive directors will be designed in such a way as to ensure the long-term success of the institution.

Remunerations policy

There must be a transparent and formal procedure for defining the remunerations policy of executive directors, and for putting together remuneration packages. No executive director may be involved in the decisions taken about his or her remuneration.

The board will appoint a remunerations committee, to contain at least 3 independent members (2 in the case of small companies), that will be in charge of deciding the remuneration of executive directors and the Chair of the board, and of making recommendations for and assessing the level and structure of remunerations of the members of senior management.

The remuneration of non-executive directors will be decided by the board itself or by the shareholders, in accordance with company statutes.

5. RELATIONSHIP WITH SHAREHOLDERS

Dialogue with shareholders

Dialogue with company shareholders must be on the basis of mutual understanding of each other’s goals and interests. The Board will be responsible for ensuring an effective dialogue with the same, and for protecting their rights.

Constructive use of Shareholders’ Meetings

The General Shareholders' Meeting should be an event that is used for meaningful communication with investors and for fomenting their participation.

The document complements the remuneration section with the A clause, which specifies how the performance-related pay of executive directors should be structured; and completes the accountability principle with the B clause, which defines which specific matters companies should disclose in their annual reports: composition of the board and committees, functions, meetings, activity of the appointments committee, evaluation of the board, of its committees and individual members, among others.

The Financial Reporting Council has programmed the new Code to come into force in June 2016.