Dated: 28 May 2010

The Financial Reporting Council has today published a revised version of the UK Corporate Governance code (formerly the Combined Code).  All companies with a Premium Listing on the London Stock Exchange must report on how they have applied the Code (according to the “comply or explain” principle). The new edition of the Code becomes effective with respect to financial years beginning on or after 29 June 2010.

The IoD’s view on the revision

• 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. It has also been a benchmark for corporate governance codes in a wide range of other countries.

• We are broadly supportive of the revisions that have been made to the Code in response to the financial crisis and the findings of the Walker Review.

• In particular, the Code’s increased emphasis on the role of the chairman, the need for constructive challenge from non-executive directors and the central role of the board in risk oversight are important additions to the Code.

• In addition, we support the idea of undertaking externally-facilitated board evaluations at least every third year, although we see no reason why this should be limited to the FTSE 350.

However, there are two changes to the Code which we do not support

1)  Annual election of directors

In our view, this could promote a short-termist mentality amongst directors. It also opens the door to individual directors being targeted at AGMs, which is not consistent with the idea of the board as a collective decision-making body.

It should also be recognised that shareholders already possess the means of removing directors from boards (through an ordinary resolution of shareholders at a General Meeting).

Our view is that insufficient engagement between boards and shareholders in the UK is not a result of inadequate shareholder rights. The main problem is the unwillingness of institutional investors to fulfil an active stewardship role. This should be the main focus of governance reform in the future.

2)  Highlighting of gender as an important factor in making appointments to the board

We support an increased emphasis on boardroom diversity. Diversity of boardroom composition in terms of personality, professional background and expertise is important in improving boardroom decision making.

However, to highlight gender specifically as something that will counter the risk of “group-think” in the boardroom is simplistic and unhelpful. Directors should be judged on the basis of their individual qualities, not according to gender or other socio-economic characteristics.

By including gender in the Code, there is a risk that the Code will increasingly become seen as a tool of social policy rather than good governance.

Commenting, Miles Templeman, Director-General of the Institute of Directors, said:

“We generally support the revisions that have been made to the Code. It was right to give increased emphasis to the role of the chairman, the need for constructive challenge from non-executive directors and the central role of the board in risk oversight. However, not all the revisions are a step in the right direction.”

“In particular, we’re concerned that annual elections of directors could promote a short-termist attitude on boards and that the FRC also seem to want to use aspects of the Code as a tool of social policy rather than just good governance. Diversity of boardroom composition in terms of personality, professional background and expertise is important in improving boardroom decision making. But this means that directors should be judged on their individual qualities and their ability to fit into a team, not according to their gender.”