Dated: 25 February 2010

In its response today to the Financial Reporting Council’s (FRC) consultation on the revised UK Corporate Governance Code, the Institute of Directors makes the following points:

• We are broadly supportive of the proposed changes to the Code, and appreciate the caution that has been exercised in incorporating the recommendations of the Walker Review into the Code. The IoD is a long-standing supporter of the Code and we believe that it has made an important contribution to good governance in the UK over the last two decades.
• We are pleased that a more rigid approach to corporate governance regulation is not being proposed. Although the financial crisis has highlighted weaknesses in financial sector governance, we remain convinced that the Code provides an appropriate regulatory framework for large listed companies. Outside of the financial sector (where a robust regulatory framework is necessary to protect taxpayers), we would not favour a shift towards a more prescriptive approach to corporate governance regulation.

However, we would make the following specific comments on the FRC proposals:

Training for Directors

• While we agree with the inclusion of the proposed new principle: “To function effectively all directors need appropriate knowledge of the company and access to its operations and staff,” we do not believe that knowledge of the company is a sufficient knowledge basis for directors.
• We strongly believe that directors should also have appropriate knowledge of applied corporate governance, including the nature of their legal duties as directors. This means that all directors of large listed companies should receive practical induction and training on the UK Corporate Governance Code, associated guidance, and relevant legislation relating to directors’ duties and responsibilities.

Annual election of a Chairman

• We are keen that the Code promotes the annual election of a Chairman, rather than annual election of each of the directors. An annual vote on the Chairman could encourage shareholders to engage with the board on its overall governance stance and on specific governance issues. A separate vote on individual directors implies that the responsibility for specific decisions can be attributed to specific individuals. This is not the case, and would undermine the integrity of collective decision-making.

Commenting on the FRC’s proposals, Miles Templeman IoD Director General said:

“There is no doubt that the financial crisis revealed serious shortcomings in financial sector governance. Major reforms to the financial regulatory framework are necessary in order to protect the future interests of taxpayers, which are already burdened by an unprecedented fiscal deficit.”

“However, in its proposed reforms of the UK Corporate Governance Code – which applies to large listed companies in all sectors – the FRC has taken an appropriately measured approach, which we support.”

“We now have a well-crafted Code. The key challenge in the coming years is to find ways to transmit the wording of Code into the day-to-day practice of individual directors”.