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We are all familiar with the Combined Code on Corporate Governance (“the Code”) which sets out standards of practice with a focus on the board, risk management and control, disclosure and engagement with shareholders.

Under the Code, the UK has adopted a “comply or explain” regime rather than a prescriptive set of rules. It is considered that the Code is broadly fit for purpose and the flexibility it allows is preferable to a more prescriptive regime.

However the recent years of turbulence and unprecedented banking failures have resulted in more scrutiny and focus on risk management and boardroom behaviours. We have already seen the report prepared by Sir David Walker and responses to his report from a number of interested parties.

In response to Sir David Walker’s report The Financial Reporting Council (“FRC”) brought forward their planned review of the Code and consultation on their proposals ended in March 2010. The proposed revisions to the Code implement some of the recommendations in the Walker Report on the governance of banks and other financial institutions that the FRC consider should apply to all listed companies.

The revised code, to be known as the UK Corporate Governance Code (“New Code”) will apply to financial years beginning on or after 29 June 2010 and will be published this month. The Listing Rules will need to be amended before the New Code can take effect, and consequential amendments may also be needed to the Disclosure and Transparency Rules.

Boardroom behaviour, risk control and management and remuneration are the main areas which have been identified as requiring consideration and the New Code has developed these themes.

We all recognise good attributes for a board to have and many will consider they are already achieving these. It often takes an independent view to identify areas for development and this is where an external and independent board evaluation can reap rewards. Board evaluation is a hot topic and the New Code recommends external facilitation of the board review at least every three years.

Remuneration – an emotive issue which has caught the interest of the public – is another area which has received a lot of attention. The FSA has issued a Code of Practice for financial institutions; and significant actions are being taken at international and European levels. Remuneration is tackled by the New Code with emphasis on performance related pay to be aligned with the long-term interest of the company and to the company’s risk policies and systems. The FRC suggested that provisions for non executive directors should be amended to clarify that all forms of performance related remuneration are discouraged and not just share options. The AIM Rules have been amended with new disclosure requirements for directors’ remuneration which have to be implemented for AIM companies with a financial year end of 31 March 2010 or thereafter.

The FRC plan further consultation on whether the chairman or all board members should stand for annual re-election. The Institute of Directors agree with the FRC’s proposals for an annual re-election of the Chairman (rather than the board as a whole). They also make the point that the proposal for the Chairman of the remuneration committee to stand for re-election if the remuneration report receives less than 75% shareholder support would give greater teeth to the remuneration report.

Under the revised Listing Regime all companies with a Premium Listing are required to report on how they have applied the Code regardless of their country of incorporation.

Whilst there is no legal requirement for a company quoted on AIM to comply with the Code there is an expectation that the principles will be applied as appropriate to the circumstances of each company. The NAPF Corporate Governance Policy supports this view and QCA has its own guidelines which set an appropriate standard for smaller companies to follow. Investor expectation is a further driver to ensure that the appropriate standards are maintained by all companies whether or not they are overseas.

The emphasis should be on providing a transparent and comprehensive justification when a company does not comply as it is the absence of a clear explanation that can cause shareholders to lack trust and understanding. If the explanations are honest and thorough, and provide context they will be better received by the investors. Boards should give the Code serious consideration and discuss their compliance with the Code on a regular basis to ensure that their review is effective. For their part investors should also engage with the companies in which they invest and accept explanations when a company chooses to explain rather than comply.

Following consultation, the FRC’s conclusion is that “there is also recognition that the quality of corporate governance ultimately depends on behaviour not process, with the result that there is a limit to the extent to which any regulatory framework can deliver good governance”. It follows that the comply or explain approach will only work if there is effective engagement between companies and shareholders and for the system to be effective the principles should be embedded into procedures and board room cultures.

Anne Couper Woods, FCIS, is Director and Company Secretary, Simcocks Trust Limited.

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