Corporate Focus

UK Corporate Governance Code

As a result of its review of the Combined Code on Corporate Governance (the Code), the Financial Reporting Council (FRC) has published the new "UK Corporate Governance Code" applicable to all companies with a premium listing on the London Stock Exchange from any accounting period beginning on or after 29 June 2010.

The main changes

The main changes to the Code are:

Board reviews FTSE 350 companies will be required to have an external evaluation of the performance of their boards conducted at least every three years. The annual report of companies will have to state how such performance evaluation has been conducted.

Re-election All directors of FTSE 350 companies will be subject to annual re-election by shareholders. The directors of all other companies will be subject to election by shareholders at the first AGM after their appointment and to re-election thereafter at intervals of no more than three years. Any non-executive directors who have served for more than nine years will also be subject to annual re-election.

Diversity The Code contains a specific reference to the requirement for diversity and, in particular, gender diversity in the composition of the board of directors, but unlike some other jurisdictions there is no specific quota requirement.

The responsibilities of the chairman and directors The chairman shall be responsible for leadership of the board and for ensuring its effectiveness. He will also have a particular responsibility for training, evaluation and board composition. The non-executive directors should constructively challenge and help develop proposals on strategy. The chairman, the senior independent directors and all other non-executive directors will be required to allocate sufficient time to perform their responsibilities effectively, but no minimum number of days is set.

Board balance and composition Under the old Code the independence of the directors was the main factor in determining and assessing the composition of the board, rather than their fitness for their position. The new Code introduces the principle which states that "the board and its committees should consist of directors with the appropriate balance of skills, experience, independence and knowledge of the company to enable it to discharge its duties and responsibilities effectively".

Risk management and internal control It will be the responsibility of the board to define the company's risk appetite and maintain a sound risk management system. The board should satisfy itself that appropriate systems are in place to identify, evaluate and manage the significant risks faced by the company.

Accountability The annual report of the companies should explain the basis on which the company generates or preserves value over the longer term and the proposed plan for delivering the company's objectives. The directors should also report in annual and half-yearly financial statements that the business is a going concern. The annual report should identify members of all board committees, not just the nomination, audit and remuneration committees.

Remuneration The performance-related elements of the executive directors' remuneration should be designed to promote the long-term success of the company and its risk policies. A requirement for consideration to be given to arrangements for reclaiming variable components in certain circumstances of misstatement or misconduct is also included. All forms of performance-related remuneration and not just share options, are discouraged for non-executive directors.

Communication with shareholders Whilst previously, the chairman, senior independent director and other directors "as appropriate" were required to maintain contact with major shareholders, under the new Code the chairman should ensure that all directors are made aware of the concerns of their major shareholders.

Conclusion The FRC stresses that it is important for companies to engage with the spirit of the new Code by applying and adhering to the main principles to nurture better transparency, accountability and communication with their shareholders.

Companies should use this opportunity to review their board policies, directors' service contracts and incentive schemes to ensure that they comply with the new Code. Although the Code applies only to companies with a premium listing on the London Stock Exchange it is reasonable to expect that institutional investors will expect at least reasonable compliance (and/or explanations as to lack of such compliance) by companies with a standard listing or those whose shares are traded on the AIM Market.

Legislation update

Difficulties with company names

The Companies and Business Names (Miscellaneous Provisions) Regulations 2009 (the 2009 Regulations) came into force on 1 October 2009 and introduced more rigorous requirements for the approval of new company names. In particular, the 2009 Regulations set out a more extensive list of words that are disregarded when determining whether one company name is the 'same as' another already on the company names index. This means that Companies House will simply ignore the specified words when judging whether a proposed name is the same as one already on the index. Examples of words which did not appear in the previous legislation but are covered by the 2009 Regulations include 'UK', 'Services' and 'Holdings'.

Prior to the 2009 Regulations, company names that included the new words...