Financial Reporting Council. June 2008

Transcription

1 Financia Reporting Counci on Corporate Governance June 2008

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3 THE COMBINED CODE ON CORPORATE GOVERNANCE June 2008

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5 CONTENTS Pages on Corporate Governance Preambe 1-3 Section 1 COMPANIES 5-20 A Directors 5-12 B Remuneration C Accountabiity and Audit D Reations with Sharehoders Section 2 INSTITUTIONAL SHAREHOLDERS E Institutiona Sharehoders Schedue A Provisions on the design of performance reated remuneration 23 Schedue B Guidance on iabiity of non-executive directors: care, ski and diigence 24 Schedue C Discosure of corporate governance arrangements 25-32

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7 CODE ON CORPORATE GOVERNANCE PREAMBLE 1. Good corporate governance shoud contribute to better company performance by heping a board discharge its duties in the best interests of sharehoders; if it is ignored, the consequence may we be vunerabiity or poor performance. Good governance shoud faciitate efficient, effective and entrepreneuria management that can deiver sharehoder vaue over the onger term. on Corporate Governance ( the Code ) is pubished by the FRC to support these outcomes and promote confidence in corporate reporting and governance. 2. The Code is not a rigid set of rues. Rather, it is a guide to the components of good board practice distied from consutation and widespread experience over many years. Whie it is expected that companies wi compy whoy or substantiay with its provisions, it is recognised that noncompiance may be justified in particuar circumstances if good governance can be achieved by other means. A condition of noncompiance is that the reasons for it shoud be expained to sharehoders, who may wish to discuss the position with the company and whose voting intentions may be infuenced as a resut. This compy or expain approach has been in operation since the Code s beginnings in 1992 and the fexibiity it offers is vaued by company boards and by investors in pursuing better corporate governance. 3. The Listing Rues require UK companies isted on the Main Market of the London Stock Exchange to describe in the annua report and accounts their corporate governance from two points of view, the first deaing generay with their adherence to the Code s main principes, and the second deaing specificay with non-compiance with any of the Code s provisions. The descriptions together shoud give sharehoders a cear and comprehensive picture of a company s governance arrangements in reation to the Code as a criterion of good practice. 4. In reation to the requirement to state how it has appied the Code s main principes, where a company has done so by compying with the associated provisions it shoud be sufficient simpy to report that this is the case; copying out the principes in the annua report adds to its ength without adding to its vaue. But where a company has taken additiona actions to appy the principes or otherwise improve its governance, it woud be hepfu to sharehoders to describe these in the annua report. 1

8 5. If a company chooses not to compy with one or more provisions of the Code, it must give sharehoders a carefu and cear expanation which sharehoders shoud evauate on its merits. In providing an expanation, the company shoud aim to iustrate how its actua practices are consistent with the principe to which the particuar provision reates and contribute to good governance. 6. Smaer isted companies, in particuar those new to isting, may judge that some of the provisions are disproportionate or ess reevant in their case. Some of the provisions do not appy to companies beow the FTSE 350. Such companies may nonetheess consider that it woud be appropriate to adopt the approach in the Code and they are encouraged to do so. Externay managed investment companies typicay have a different board structure, which may affect the reevance of particuar provisions; the Association of Investment Companies s Corporate Governance Code and Guide can assist them in meeting their obigations under the Code. 7. In their turn, sharehoders shoud pay due regard to companies individua circumstances and bear in mind in particuar the size and compexity of the company and the nature of the risks and chaenges it faces. Whist sharehoders have every right to chaenge companies expanations if they are unconvincing, they shoud not be evauated in a mechanistic way and departures from the Code shoud not be automaticay treated as breaches. Institutiona sharehoders shoud be carefu to respond to the statements from companies in a manner that supports the compy or expain principe and bearing in mind the purpose of good corporate governance. They shoud put their views to the company and be prepared to enter a diaogue if they do not accept the company s position. Institutiona sharehoders shoud be prepared to put such views in writing where appropriate. 8. Companies and sharehoders have a shared responsibiity for ensuring that compy or expain remains an effective aternative to a rues-based system. Satisfactory engagement between company boards and investors is therefore crucia to the heath of the UK s corporate governance regime. Athough engagement has been improving sowy but steadiy for many years, practica obstaces necessitate a constant effort to keep the improvement going. 9. Companies can make a major contribution by spreading governance discussion with sharehoders outside the two peak annua reporting periods around 31 st December and 31 st March and by raising further the genera standard of their expanations justifying non-compiance. Sharehoders for their part can sti do more to satisfy companies that they devote adequate resources and scrutiny to engagement. 2

9 10. References to sharehoders in this Preambe aso appy to intermediaries and agents empoyed to assist sharehoders in scrutinising governance arrangements. 11. This edition of the Code appies to accounting periods beginning on or after 29 June 2008, and takes effect at the same time as new FSA Corporate Governance Rues impementing European requirements reating to audit committees and corporate governance statements. The reevant sections of these Rues are summarised in Schedue C. There is some overap between the content of the Code and the Rues, and the Rues state that in these areas compiance with the Code wi be deemed sufficient aso to compy with the Rues. However, where a company chooses to expain rather than compy with the Code it wi need to demonstrate that it nonetheess meets the minimum requirements set out in the Rues. 12. The Code itsef is subject to periodic reviews by the FRC, the atest of which was conducted in 2007 and was generay reassuring about the Code s content and impact. In the norma course of events the next review wi take pace in Financia Reporting Counci June

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11 CODE OF BEST PRACTICE SECTION 1 COMPANIES A. DIRECTORS A.1 The Board Main Principe Every company shoud be headed by an effective board, which is coectivey responsibe for the success of the company. Supporting Principes The board s roe is to provide entrepreneuria eadership of the company within a framework of prudent and effective contros which enabes risk to be assessed and managed. The board shoud set the company s strategic aims, ensure that the necessary financia and human resources are in pace for the company to meet its objectives and review management performance. The board shoud set the company s vaues and standards and ensure that its obigations to its sharehoders and others are understood and met. A directors must take decisions objectivey in the interests of the company. As part of their roe as members of a unitary board, non-executive directors shoud constructivey chaenge and hep deveop proposas on strategy. Non-executive directors shoud scrutinise the performance of management in meeting agreed goas and objectives and monitor the reporting of performance. They shoud satisfy themseves on the integrity of financia information and that financia contros and systems of risk management are robust and defensibe. They are responsibe for determining appropriate eves of remuneration of executive directors and have a prime roe in appointing, and where necessary removing, executive directors, and in succession panning. 5

12 Code Provisions A.1.1 The board shoud meet sufficienty reguary to discharge its duties effectivey. There shoud be a forma schedue of matters specificay reserved for its decision. The annua report shoud incude a statement of how the board operates, incuding a high eve statement of which types of decisions are to be taken by the board and which are to be deegated to management. A.1.2 The annua report shoud identify the chairman, the deputy chairman (where there is one), the chief executive, the senior independent director and the chairmen and members of the nomination, audit and remuneration committees. It shoud aso set out the number of meetings of the board and those committees and individua attendance by directors 1. A.1.3 The chairman shoud hod meetings with the non-executive directors without the executives present. Led by the senior independent director, the non-executive directors shoud meet without the chairman present at east annuay to appraise the chairman s performance (as described in A.6.1) and on such other occasions as are deemed appropriate. A.1.4 Where directors have concerns which cannot be resoved about the running of the company or a proposed action, they shoud ensure that their concerns are recorded in the board minutes. On resignation, a nonexecutive director shoud provide a written statement to the chairman, for circuation to the board, if they have any such concerns. A.1.5 The company shoud arrange appropriate insurance cover in respect of ega action against its directors. A.2 Chairman and chief executive Main Principe There shoud be a cear division of responsibiities at the head of the company between the running of the board and the executive responsibiity for the running of the company s business. No one individua shoud have unfettered powers of decision. Supporting Principe The chairman is responsibe for eadership of the board, ensuring its effectiveness on a aspects of its roe and setting its agenda. The 1 Provisions A.1.1 and A.1.2 overap with FSA Rue DTR R; Provision A.1.2 aso overaps with DTR R (see Schedue C). 6

13 chairman is aso responsibe for ensuring that the directors receive accurate, timey and cear information. The chairman shoud ensure effective communication with sharehoders. The chairman shoud aso faciitate the effective contribution of non-executive directors in particuar and ensure constructive reations between executive and non-executive directors. Code Provisions A.2.1 The roes of chairman and chief executive shoud not be exercised by the same individua. The division of responsibiities between the chairman and chief executive shoud be ceary estabished, set out in writing and agreed by the board. A.2.2 The chairman shoud on appointment meet the independence criteria set out in A.3.1 beow. A chief executive shoud not go on to be chairman of the same company. If exceptionay a board decides that a chief executive shoud become chairman, the board shoud consut major sharehoders in advance and shoud set out its reasons to sharehoders at the time of the appointment and in the next annua report 2. A.3 Board baance and independence Main Principe The board shoud incude a baance of executive and non-executive directors (and in particuar independent non-executive directors) such that no individua or sma group of individuas can dominate the board s decision taking. Supporting Principes The board shoud not be so arge as to be unwiedy. The board shoud be of sufficient size that the baance of skis and experience is appropriate for the requirements of the business and that changes to the board s composition can be managed without undue disruption. To ensure that power and information are not concentrated in one or two individuas, there shoud be a strong presence on the board of both executive and non-executive directors. The vaue of ensuring that committee membership is refreshed and that undue reiance is not paced on particuar individuas shoud be taken into account in deciding chairmanship and membership of committees. 2 Compiance or otherwise with this provision need ony be reported for the year in which the appointment is made 7

14 No one other than the committee chairman and members is entited to be present at a meeting of the nomination, audit or remuneration committee, but others may attend at the invitation of the committee. Code provisions A.3.1 The board shoud identify in the annua report each non-executive director it considers to be independent 3. The board shoud determine whether the director is independent in character and judgement and whether there are reationships or circumstances which are ikey to affect, or coud appear to affect, the director s judgement. The board shoud state its reasons if it determines that a director is independent notwithstanding the existence of reationships or circumstances which may appear reevant to its determination, incuding if the director: has been an empoyee of the company or group within the ast five years; has, or has had within the ast three years, a materia business reationship with the company either directy, or as a partner, sharehoder, director or senior empoyee of a body that has such a reationship with the company; has received or receives additiona remuneration from the company apart from a director s fee, participates in the company s share option or a performance-reated pay scheme, or is a member of the company s pension scheme; has cose famiy ties with any of the company s advisers, directors or senior empoyees; hods cross-directorships or has significant inks with other directors through invovement in other companies or bodies; represents a significant sharehoder; or has served on the board for more than nine years from the date of their first eection. A.3.2 Except for smaer companies 4, at east haf the board, excuding the chairman, shoud comprise non-executive directors determined by the board to be independent. A smaer company shoud have at east two independent non-executive directors. A.3.3 The board shoud appoint one of the independent non-executive directors to be the senior independent director. The senior independent director shoud be avaiabe to sharehoders if they have 3 A.2.2 states that the chairman shoud, on appointment, meet the independence criteria set out in this provision, but thereafter the test of independence is not appropriate in reation to the chairman. 4 A smaer company is one that is beow the FTSE 350 throughout the year immediatey prior to the reporting year. 8

15 concerns which contact through the norma channes of chairman, chief executive or finance director has faied to resove or for which such contact is inappropriate. A.4 Appointments to the Board Main Principe There shoud be a forma, rigorous and transparent procedure for the appointment of new directors to the board. Supporting Principes Appointments to the board shoud be made on merit and against objective criteria. Care shoud be taken to ensure that appointees have enough time avaiabe to devote to the job. This is particuary important in the case of chairmanships. The board shoud satisfy itsef that pans are in pace for ordery succession for appointments to the board and to senior management, so as to maintain an appropriate baance of skis and experience within the company and on the board. Code Provisions A.4.1 There shoud be a nomination committee which shoud ead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee shoud be independent non-executive directors. The chairman or an independent non-executive director shoud chair the committee, but the chairman shoud not chair the nomination committee when it is deaing with the appointment of a successor to the chairmanship. The nomination committee shoud make avaiabe 5 its terms of reference, expaining its roe and the authority deegated to it by the board. A.4.2 The nomination committee shoud evauate the baance of skis, knowedge and experience on the board and, in the ight of this evauation, prepare a description of the roe and capabiities required for a particuar appointment. A.4.3 For the appointment of a chairman, the nomination committee shoud prepare a job specification, incuding an assessment of the time commitment expected, recognising the need for avaiabiity in the event of crises. A chairman s other significant commitments shoud be 5 The requirement to make the information avaiabe woud be met by incuding the information on a website that is maintained by or on behaf of the company. 9

16 discosed to the board before appointment and incuded in the annua report. Changes to such commitments shoud be reported to the board as they arise, and their impact expained in the next annua report. A.4.4 The terms and conditions of appointment of non-executive directors shoud be made avaiabe for inspection 6. The etter of appointment shoud set out the expected time commitment. Non-executive directors shoud undertake that they wi have sufficient time to meet what is expected of them. Their other significant commitments shoud be discosed to the board before appointment, with a broad indication of the time invoved and the board shoud be informed of subsequent changes. A.4.5 The board shoud not agree to a fu time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company. A.4.6 A separate section of the annua report shoud describe the work of the nomination committee, incuding the process it has used in reation to board appointments 7. An expanation shoud be given if neither an externa search consutancy nor open advertising has been used in the appointment of a chairman or a non-executive director. A.5 Information and professiona deveopment Main Principe The board shoud be suppied in a timey manner with information in a form and of a quaity appropriate to enabe it to discharge its duties. A directors shoud receive induction on joining the board and shoud reguary update and refresh their skis and knowedge. Supporting Principes The chairman is responsibe for ensuring that the directors receive accurate, timey and cear information. Management has an obigation to provide such information but directors shoud seek carification or ampification where necessary. The chairman shoud ensure that the directors continuay update their skis and the knowedge and famiiarity with the company required to fufi their roe both on the board and on board committees. The company 6 The terms and conditions of appointment of non-executive directors shoud be made avaiabe for inspection by any person at the company s registered office during norma business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting). 7 This provision overaps with FSA Rue DTR R (see Schedue C). 10

17 shoud provide the necessary resources for deveoping and updating its directors knowedge and capabiities. Under the direction of the chairman, the company secretary s responsibiities incude ensuring good information fows within the board and its committees and between senior management and nonexecutive directors, as we as faciitating induction and assisting with professiona deveopment as required. The company secretary shoud be responsibe for advising the board through the chairman on a governance matters. Code Provisions A.5.1 The chairman shoud ensure that new directors receive a fu, forma and taiored induction on joining the board. As part of this, the company shoud offer to major sharehoders the opportunity to meet a new nonexecutive director. A.5.2 The board shoud ensure that directors, especiay non-executive directors, have access to independent professiona advice at the company s expense where they judge it necessary to discharge their responsibiities as directors. Committees shoud be provided with sufficient resources to undertake their duties. A.5.3 A directors shoud have access to the advice and services of the company secretary, who is responsibe to the board for ensuring that board procedures are compied with. Both the appointment and remova of the company secretary shoud be a matter for the board as a whoe. A.6 Performance evauation Main Principe The board shoud undertake a forma and rigorous annua evauation of its own performance and that of its committees and individua directors. Supporting Principe Individua evauation shoud aim to show whether each director continues to contribute effectivey and to demonstrate commitment to the roe (incuding commitment of time for board and committee meetings and any other duties). The chairman shoud act on the resuts of the performance evauation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors. 11

18 Code Provision A.6.1 The board shoud state in the annua report how performance evauation of the board, its committees and its individua directors has been conducted. The non-executive directors, ed by the senior independent director, shoud be responsibe for performance evauation of the chairman, taking into account the views of executive directors. A.7 Re-eection Main Principe A directors shoud be submitted for re-eection at reguar intervas, subject to continued satisfactory performance. The board shoud ensure panned and progressive refreshing of the board. Code Provisions A.7.1 A directors shoud be subject to eection by sharehoders at the first annua genera meeting after their appointment, and to re-eection thereafter at intervas of no more than three years. The names of directors submitted for eection or re-eection shoud be accompanied by sufficient biographica detais and any other reevant information to enabe sharehoders to take an informed decision on their eection. A.7.2 Non-executive directors shoud be appointed for specified terms subject to re-eection and to Companies Acts provisions reating to the remova of a director. The board shoud set out to sharehoders in the papers accompanying a resoution to eect a non-executive director why they beieve an individua shoud be eected. The chairman shoud confirm to sharehoders when proposing re-eection that, foowing forma performance evauation, the individua s performance continues to be effective and to demonstrate commitment to the roe. Any term beyond six years (e.g. two three-year terms) for a non-executive director shoud be subject to particuary rigorous review, and shoud take into account the need for progressive refreshing of the board. Non-executive directors may serve onger than nine years (e.g. three three-year terms), subject to annua re-eection. Serving more than nine years coud be reevant to the determination of a non-executive director s independence (as set out in provision A.3.1). 12

19 B. REMUNERATION B.1 The Leve and Make-up of Remuneration Main Principes Leves of remuneration shoud be sufficient to attract, retain and motivate directors of the quaity required to run the company successfuy, but a company shoud avoid paying more than is necessary for this purpose. A significant proportion of executive directors remuneration shoud be structured so as to ink rewards to corporate and individua performance. Supporting Principe The remuneration committee shoud judge where to position their company reative to other companies. But they shoud use such comparisons with caution, in view of the risk of an upward ratchet of remuneration eves with no corresponding improvement in performance. They shoud aso be sensitive to pay and empoyment conditions esewhere in the group, especiay when determining annua saary increases. Code Provisions Remuneration poicy B.1.1 The performance-reated eements of remuneration shoud form a significant proportion of the tota remuneration package of executive directors and shoud be designed to aign their interests with those of sharehoders and to give these directors keen incentives to perform at the highest eves. In designing schemes of performance-reated remuneration, the remuneration committee shoud foow the provisions in Schedue A to this Code. B.1.2 Executive share options shoud not be offered at a discount save as permitted by the reevant provisions of the Listing Rues. B.1.3 Leves of remuneration for non-executive directors shoud refect the time commitment and responsibiities of the roe. Remuneration for nonexecutive directors shoud not incude share options. If, exceptionay, options are granted, sharehoder approva shoud be sought in advance and any shares acquired by exercise of the options shoud be hed unti at east one year after the non-executive director eaves the board. Hoding of share options coud be reevant to the determination of a non-executive director s independence (as set out in provision A.3.1). 13

20 B.1.4 Where a company reeases an executive director to serve as a nonexecutive director esewhere, the remuneration report 8 shoud incude a statement as to whether or not the director wi retain such earnings and, if so, what the remuneration is. Service Contracts and Compensation B.1.5 The remuneration committee shoud carefuy consider what compensation commitments (incuding pension contributions and a other eements) their directors terms of appointment woud entai in the event of eary termination. The aim shoud be to avoid rewarding poor performance. They shoud take a robust ine on reducing compensation to refect departing directors obigations to mitigate oss. B.1.6 Notice or contract periods shoud be set at one year or ess. If it is necessary to offer onger notice or contract periods to new directors recruited from outside, such periods shoud reduce to one year or ess after the initia period. B.2 Procedure Main Principe There shoud be a forma and transparent procedure for deveoping poicy on executive remuneration and for fixing the remuneration packages of individua directors. No director shoud be invoved in deciding his or her own remuneration. Supporting Principes The remuneration committee shoud consut the chairman and/or chief executive about their proposas reating to the remuneration of other executive directors. The remuneration committee shoud aso be responsibe for appointing any consutants in respect of executive director remuneration. Where executive directors or senior management are invoved in advising or supporting the remuneration committee, care shoud be taken to recognise and avoid conficts of interest. The chairman of the board shoud ensure that the company maintains contact as required with its principa sharehoders about remuneration in the same way as for other matters. 8 As required under the Directors Remuneration Report Reguations

21 Code Provisions B.2.1 The board shoud estabish a remuneration committee of at east three, or in the case of smaer companies 9 two, independent non-executive directors. In addition the company chairman may aso be a member of, but not chair, the committee if he or she was considered independent on appointment as chairman. The remuneration committee shoud make avaiabe 10 its terms of reference, expaining its roe and the authority deegated to it by the board. Where remuneration consutants are appointed, a statement shoud be made avaiabe 11 of whether they have any other connection with the company. B.2.2 The remuneration committee shoud have deegated responsibiity for setting remuneration for a executive directors and the chairman, incuding pension rights and any compensation payments. The committee shoud aso recommend and monitor the eve and structure of remuneration for senior management. The definition of senior management for this purpose shoud be determined by the board but shoud normay incude the first ayer of management beow board eve. B.2.3 The board itsef or, where required by the Artices of Association, the sharehoders shoud determine the remuneration of the non-executive directors within the imits set in the Artices of Association. Where permitted by the Artices, the board may however deegate this responsibiity to a committee, which might incude the chief executive. B.2.4 Sharehoders shoud be invited specificay to approve a new ong-term incentive schemes (as defined in the Listing Rues) and significant changes to existing schemes, save in the circumstances permitted by the Listing Rues. 9 See footnote This provision overaps with FSA Rue DTR R (see Schedue C). 11 See footnote 5. 15

22 C. ACCOUNTABILITY AND AUDIT C.1 Financia Reporting Main Principe The board shoud present a baanced and understandabe assessment of the company s position and prospects. Supporting Principe The board s responsibiity to present a baanced and understandabe assessment extends to interim and other price-sensitive pubic reports and reports to reguators as we as to information required to be presented by statutory requirements. Code Provisions C.1.1 The directors shoud expain in the annua report their responsibiity for preparing the accounts and there shoud be a statement by the auditors about their reporting responsibiities. C.1.2 The directors shoud report that the business is a going concern, with supporting assumptions or quaifications as necessary. C.2 Interna Contro 12 Main Principe The board shoud maintain a sound system of interna contro to safeguard sharehoders investment and the company s assets. Code Provision C.2.1 The board shoud, at east annuay, conduct a review of the effectiveness of the group s system of interna contros and shoud report to sharehoders that they have done so 13. The review shoud cover a materia contros, incuding financia, operationa and compiance contros and risk management systems. 12 The Turnbu guidance suggests means of appying this part of the Code. Copies are avaiabe at 13 In addition FSA Rue DTR R requires companies to describe the main features of the interna contro and risk management systems in reation to the financia reporting process (see Schedue C). 16

23 C.3 Audit Committee and Auditors 14 Main Principe The board shoud estabish forma and transparent arrangements for considering how they shoud appy the financia reporting and interna contro principes and for maintaining an appropriate reationship with the company s auditors. Code provisions C.3.1 The board shoud estabish an audit committee of at east three, or in the case of smaer companies 15 two, independent non-executive directors. In smaer companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board shoud satisfy itsef that at east one member of the audit committee has recent and reevant financia experience 16. C.3.2 The main roe and responsibiities of the audit committee shoud be set out in written terms of reference and shoud incude 17 : to monitor the integrity of the financia statements of the company, and any forma announcements reating to the company s financia performance, reviewing significant financia reporting judgements contained in them; to review the company s interna financia contros and, uness expressy addressed by a separate board risk committee composed of independent directors, or by the board itsef, to review the company s interna contro and risk management systems; to monitor and review the effectiveness of the company s interna audit function; to make recommendations to the board, for it to put to the sharehoders for their approva in genera meeting, in reation to the appointment, re-appointment and remova of the externa auditor and to approve the remuneration and terms of engagement of the externa auditor; to review and monitor the externa auditor s independence and objectivity and the effectiveness of the audit process, taking into consideration reevant UK professiona and reguatory requirements; 14 The Smith guidance suggests means of appying this part of the Code. Copies are avaiabe at 15 See footnote This provision overaps with FSA Rue DTR R (see Schedue C). 17 This provision overaps with FSA Rues DTR R (see Schedue C). 17

24 to deveop and impement poicy on the engagement of the externa auditor to suppy non-audit services, taking into account reevant ethica guidance regarding the provision of non-audit services by the externa audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken. C.3.3 The terms of reference of the audit committee, incuding its roe and the authority deegated to it by the board, shoud be made avaiabe 18. A separate section of the annua report shoud describe the work of the committee in discharging those responsibiities 19. C.3.4 The audit committee shoud review arrangements by which staff of the company may, in confidence, raise concerns about possibe improprieties in matters of financia reporting or other matters. The audit committee s objective shoud be to ensure that arrangements are in pace for the proportionate and independent investigation of such matters and for appropriate foow-up action. C.3.5 The audit committee shoud monitor and review the effectiveness of the interna audit activities. Where there is no interna audit function, the audit committee shoud consider annuay whether there is a need for an interna audit function and make a recommendation to the board, and the reasons for the absence of such a function shoud be expained in the reevant section of the annua report. C.3.6 The audit committee shoud have primary responsibiity for making a recommendation on the appointment, reappointment and remova of the externa auditors. If the board does not accept the audit committee s recommendation, it shoud incude in the annua report, and in any papers recommending appointment or re-appointment, a statement from the audit committee expaining the recommendation and shoud set out reasons why the board has taken a different position. C.3.7 The annua report shoud expain to sharehoders how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded. 18 See footnote This provision overaps with FSA Rues DTR R and R (see Schedue C). 18

25 D. RELATIONS WITH SHAREHOLDERS D.1 Diaogue with Institutiona Sharehoders Main Principe There shoud be a diaogue with sharehoders based on the mutua understanding of objectives. The board as a whoe has responsibiity for ensuring that a satisfactory diaogue with sharehoders takes pace 20. Supporting Principes Whist recognising that most sharehoder contact is with the chief executive and finance director, the chairman (and the senior independent director and other directors as appropriate) shoud maintain sufficient contact with major sharehoders to understand their issues and concerns. The board shoud keep in touch with sharehoder opinion in whatever ways are most practica and efficient. Code Provisions D.1.1 The chairman shoud ensure that the views of sharehoders are communicated to the board as a whoe. The chairman shoud discuss governance and strategy with major sharehoders. Non-executive directors shoud be offered the opportunity to attend meetings with major sharehoders and shoud expect to attend them if requested by major sharehoders. The senior independent director shoud attend sufficient meetings with a range of major sharehoders to isten to their views in order to hep deveop a baanced understanding of the issues and concerns of major sharehoders. D.1.2 The board shoud state in the annua report the steps they have taken to ensure that the members of the board, and in particuar the non-executive directors, deveop an understanding of the views of major sharehoders about their company, for exampe through direct face-to-face contact, anaysts or brokers briefings and surveys of sharehoder opinion. 20 Nothing in these principes or provisions shoud be taken to override the genera requirements of aw to treat sharehoders equay in access to information. 19

26 D.2 Constructive Use of the AGM Main Principe The board shoud use the AGM to communicate with investors and to encourage their participation. Code Provisions D.2.1 At any genera meeting, the company shoud propose a separate resoution on each substantiay separate issue, and shoud in particuar propose a resoution at the AGM reating to the report and accounts. For each resoution, proxy appointment forms shoud provide sharehoders with the option to direct their proxy to vote either for or against the resoution or to withhod their vote. The proxy form and any announcement of the resuts of a vote shoud make it cear that a vote withhed is not a vote in aw and wi not be counted in the cacuation of the proportion of the votes for and against the resoution. D.2.2 The company shoud ensure that a vaid proxy appointments received for genera meetings are propery recorded and counted. For each resoution, after a vote has been taken, except where taken on a po, the company shoud ensure that the foowing information is given at the meeting and made avaiabe as soon as reasonaby practicabe on a website which is maintained by or on behaf of the company: the number of shares in respect of which proxy appointments have been vaidy made; the number of votes for the resoution; the number of votes against the resoution; and the number of shares in respect of which the vote was directed to be withhed. D.2.3 The chairman shoud arrange for the chairmen of the audit, remuneration and nomination committees to be avaiabe to answer questions at the AGM and for a directors to attend. D.2.4 The company shoud arrange for the Notice of the AGM and reated papers to be sent to sharehoders at east 20 working days before the meeting. 20

27 SECTION 2 INSTITUTIONAL SHAREHOLDERS E. INSTITUTIONAL SHAREHOLDERS 21 E.1 Diaogue with companies Main Principe Institutiona sharehoders shoud enter into a diaogue with companies based on the mutua understanding of objectives. Supporting Principes Institutiona sharehoders shoud appy the principes set out in the Institutiona Sharehoders Committee s The Responsibiities of Institutiona Sharehoders and Agents Statement of Principes 22, which shoud be refected in fund manager contracts. E.2 Evauation of Governance Discosures Main Principe When evauating companies governance arrangements, particuary those reating to board structure and composition, institutiona sharehoders shoud give due weight to a reevant factors drawn to their attention. Supporting Principe Institutiona sharehoders shoud consider carefuy expanations given for departure from this Code and make reasoned judgements in each case. They shoud give an expanation to the company, in writing where appropriate, and be prepared to enter a diaogue if they do not accept the company s position. They shoud avoid a box-ticking approach to assessing a company s corporate governance. They shoud bear in mind in particuar the size and compexity of the company and the nature of the risks and chaenges it faces. 21 Agents such as investment managers, or voting services, are frequenty appointed by institutiona sharehoders to act on their behaf and these principes shoud accordingy be read as appying where appropriate to the agents of institutiona sharehoders. 22 Avaiabe at 21

28 E.3 Sharehoder Voting Main Principe Institutiona sharehoders have a responsibiity to make considered use of their votes. Supporting Principes Institutiona sharehoders shoud take steps to ensure their voting intentions are being transated into practice. Institutiona sharehoders shoud, on request, make avaiabe to their cients information on the proportion of resoutions on which votes were cast and non-discretionary proxies odged. Major sharehoders shoud attend AGMs where appropriate and practicabe. Companies and registrars shoud faciitate this. 22

29 Schedue A: Provisions on the design of performance reated remuneration 1. The remuneration committee shoud consider whether the directors shoud be eigibe for annua bonuses. If so, performance conditions shoud be reevant, stretching and designed to enhance sharehoder vaue. Upper imits shoud be set and discosed. There may be a case for part payment in shares to be hed for a significant period. 2. The remuneration committee shoud consider whether the directors shoud be eigibe for benefits under ong-term incentive schemes. Traditiona share option schemes shoud be weighed against other kinds of ong-term incentive scheme. In norma circumstances, shares granted or other forms of deferred remuneration shoud not vest, and options shoud not be exercisabe, in ess than three years. Directors shoud be encouraged to hod their shares for a further period after vesting or exercise, subject to the need to finance any costs of acquisition and associated tax iabiities. 3. Any new ong-term incentive schemes which are proposed shoud be approved by sharehoders and shoud preferaby repace any existing schemes or at east form part of a we considered overa pan, incorporating existing schemes. The tota rewards potentiay avaiabe shoud not be excessive. 4. Payouts or grants under a incentive schemes, incuding new grants under existing share option schemes, shoud be subject to chaenging performance criteria refecting the company s objectives. Consideration shoud be given to criteria which refect the company s performance reative to a group of comparator companies in some key variabes such as tota sharehoder return. 5. Grants under executive share option and other ong-term incentive schemes shoud normay be phased rather than awarded in one arge bock. 6. In genera, ony basic saary shoud be pensionabe. 7. The remuneration committee shoud consider the pension consequences and associated costs to the company of basic saary increases and any other changes in pensionabe remuneration, especiay for directors cose to retirement. 23

30 Schedue B: Guidance on iabiity of non-executive directors: care, ski and diigence 1. Athough non-executive directors and executive directors have as board members the same ega duties and objectives, the time devoted to the company s affairs is ikey to be significanty ess for a non-executive director than for an executive director and the detaied knowedge and experience of a company s affairs that coud reasonaby be expected of a non-executive director wi generay be ess than for an executive director. These matters may be reevant in assessing the knowedge, ski and experience which may reasonaby be expected of a non-executive director and therefore the care, ski and diigence that a non-executive director may be expected to exercise. 2. In this context, the foowing eements of the Code may aso be particuary reevant. (i) In order to enabe directors to fufi their duties, the Code states that: The etter of appointment of the director shoud set out the expected time commitment (Code provision A.4.4); and The board shoud be suppied in a timey manner with information in a form and of a quaity appropriate to enabe it to discharge its duties. The chairman is responsibe for ensuring that the directors are provided by management with accurate, timey and cear information. (Code principe A.5). (ii) Non-executive directors shoud themseves: Undertake appropriate induction and reguary update and refresh their skis, knowedge and famiiarity with the company (Code principe A.5 and provision A.5.1) Seek appropriate carification or ampification of information and, where necessary, take and foow appropriate professiona advice. (Code principe A.5 and provision A.5.2) Where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the board and, to the extent that they are not resoved, ensure that they are recorded in the board minutes (Code provision A.1.4). Give a statement to the board if they have such unresoved concerns on resignation (Code provision A.1.4) 3. It is up to each non-executive director to reach a view as to what is necessary in particuar circumstances to compy with the duty of care, ski and diigence they owe as a director to the company. In considering whether or not a person is in breach of that duty, a court woud take into account a reevant circumstances. These may incude having regard to the above where reevant to the issue of iabiity of a non-executive director. 24

31 Schedue C: Discosure of Corporate Governance Arrangements Corporate governance discosure requirements are set out in three paces: FSA Listing Rue (which incudes the compy or expain requirement); FSA Discosure and Transparency Rues Sections 7.1 and 7.2 (which set out certain mandatory discosures); and (in addition to providing an expanation where they choose not to compy with a provision, companies must discose specified information in order to compy with certain provisions). These requirements are summarised beow. The fu text of Listing Rue and Discosure and Transparency Rues 7.1 and 7.2 are contained in the Listing, Prospectus and Discosure section of the FSA Handbook, which can be found at There is some overap between the mandatory discosures required under the Discosure and Transparency Rues and those expected under the Combined Code. Areas of overap are summarised in the Appendix to this Schedue. In respect of discosures reating to the audit committee and the composition and operation of the board and its committees, compiance with the reevant provisions of the Code wi resut in compiance with the reevant Rues. Listing Rues Paragraph R of the Listing Rues states that in the case of a isted company incorporated in the United Kingdom, the foowing items must be incuded in its annua report and accounts: a statement of how the isted company has appied the Main Principes set out in Section 1 of the Combined Code, in a manner that woud enabe sharehoders to evauate how the principes have been appied; a statement as to whether the isted company has: compied throughout the accounting period with a reevant provisions set out in Section 1 of the Combined Code; or not compied throughout the accounting period with a reevant provisions set out in Section 1 of the Combined Code and if so, setting out: (i) those provisions, if any, it has not compied with; 25

32 (ii) in the case of provisions whose requirements are of a continuing nature, the period within which, if any, it did not compy with some or a of those provisions; and (iii) the company s reasons for non-compiance. Discosure and Transparency Rues Section 7.1 of the Discosure and Transparency Rues concerns audit committees or bodies carrying out equivaent functions. DTR R to R sets out requirements reating to the composition and functions of the committee or equivaent body: DTR R states that an issuer must have a body which is responsibe for performing the functions set out in DTR R, and that at east one member of that body must be independent and at east one member must have competence in accounting and/or auditing. DTR G states that the requirements for independence and competence in accounting and/or auditing may be satisfied by the same member or by different members of the reevant body. DTR R states that an issuer must ensure that, as a minimum, the reevant body must: (1) monitor the financia reporting process; (2) monitor the effectiveness of the issuer s interna contro, interna audit where appicabe, and risk management systems; (3) monitor the statutory audit of the annua and consoidated accounts; (4) review and monitor the independence of the statutory auditor, and in particuar the provision of additiona services to the issuer. DTR R to R expain what discosure is required: DTR R states that the issuer must make a statement avaiabe to the pubic discosing which body carries out the functions required by DTR R and how it is composed. DTR G states that this can be incuded in the corporate governance statement required under DTR 7.2 (see beow). DTR R states that compiance with the reevant provisions of the Combined Code (as set out in the Appendix to this Schedue) wi resut in compiance with DTR R to R. 26

33 Section 7.2 concerns corporate governance statements. Issuers are required to produce a corporate governance statement that must be either incuded in the directors report (DTR R); or in a separate report pubished together with the annua report; or on the issuer s website, in which case there must be a cross-reference in the directors report (DTR R). DTR R requires that the corporate governance statements must contain a reference to the corporate governance code to which the company is subject (for isted companies incorporated in the UK this is the Combined Code). DTR R requires that, to the extent that it departs from that code, the company must expain which parts of the code it departs from and the reasons for doing so. DTR G states that compiance with LR 9.8.6R (6) (the compy or expain rue in reation to the Combined Code) wi aso satisfy these requirements. DTR R to R and DTR R set out certain information that must be discosed in the corporate governance statement: DTR R states that the corporate governance statement must contain a description of the main features of the company s interna contro and risk management systems in reation to the financia reporting process. DTR R states that an issuer which is required to prepare a group directors report within the meaning of Section 415(2) of the Companies Act 2006 must incude in that report a description of the main features of the group s interna contro and risk management systems in reation to the process for preparing consoidated accounts. DTR R states that the corporate governance statement must contain the information required by paragraph 13(2)(c), (d), (f), (h) and (i) of Schedue 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Reguations 2008 (SI 2008/410) where the issuer is subject to the requirements of that paragraph. DTR R states that the corporate governance statement must contain a description of the composition and operation of the issuer s administrative, management and supervisory bodies and their committees. DTR G states that compiance with the reevant provisions of the Combined Code (as set out in the Appendix to this Schedue) wi satisfy the requirements of DTR R. 27

34 In addition the Code incudes specific requirements for discosure which are set out beow: The annua report shoud record: a statement of how the board operates, incuding a high eve statement of which types of decisions are to be taken by the board and which are to be deegated to management (A.1.1); the names of the chairman, the deputy chairman (where there is one), the chief executive, the senior independent director and the chairmen and members of the nomination, audit and remuneration committees (A.1.2); the number of meetings of the board and those committees and individua attendance by directors (A.1.2); the names of the non-executive directors whom the board determines to be independent, with reasons where necessary (A.3.1); the other significant commitments of the chairman and any changes to them during the year (A.4.3); how performance evauation of the board, its committees and its directors has been conducted (A.6.1); the steps the board has taken to ensure that members of the board, and in particuar the non-executive directors, deveop an understanding of the views of major sharehoders about their company (D.1.2). The annua report shoud aso incude: a separate section describing the work of the nomination committee, incuding the process it has used in reation to board appointments and an expanation if neither externa search consutancy nor open advertising has been used in the appointment of a chairman or a non-executive director (A.4.6); a description of the work of the remuneration committee as required under the Directors Remuneration Report Reguations 2002, and incuding, where an executive director serves as a non-executive director esewhere, whether or not the director wi retain such earnings and, if so, what the remuneration is (B.1.4); an expanation from the directors of their responsibiity for preparing the accounts and a statement by the auditors about their reporting responsibiities (C.1.1); 28

35 a statement from the directors that the business is a going concern, with supporting assumptions or quaifications as necessary (C.1.2); a report that the board has conducted a review of the effectiveness of the group s system of interna contros (C.2.1); a separate section describing the work of the audit committee in discharging its responsibiities (C.3.3); where there is no interna audit function, the reasons for the absence of such a function (C.3.5); where the board does not accept the audit committee s recommendation on the appointment, reappointment or remova of an externa auditor, a statement from the audit committee expaining the recommendation and the reasons why the board has taken a different position (C.3.6); and an expanation of how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded (C.3.7). The foowing information shoud be made avaiabe (which may be met by pacing the information on a website that is maintained by or on behaf of the company): the terms of reference of the nomination, remuneration and audit committees, expaining their roe and the authority deegated to them by the board (A.4.1, B.2.1 and C.3.3); the terms and conditions of appointment of non-executive directors (A.4.4) (see footnote 8 on page 10); and where remuneration consutants are appointed, a statement of whether they have any other connection with the company (B.2.1). The board shoud set out to sharehoders in the papers accompanying a resoution to eect or re-eect directors: sufficient biographica detais to enabe sharehoders to take an informed decision on their eection or re-eection (A.7.1); why they beieve an individua shoud be eected to a non-executive roe (A.7.2); and on re-eection of a non-executive director, confirmation from the chairman that, foowing forma performance evauation, the individua s performance continues to be effective and to demonstrate commitment to the roe, incuding commitment of time for board and committee meetings and any other duties (A.7.2). 29

36 The board shoud set out to sharehoders in the papers recommending appointment or reappointment of an externa auditor: if the board does not accept the audit committee s recommendation, a statement from the audit committee expaining the recommendation and from the board setting out reasons why they have taken a different position (C.3.6). Additiona guidance The Turnbu Guidance and Smith Guidance contain further suggestions as to information that might usefuy be discosed in the interna contro statement and the report of the audit committee respectivey. Both sets of guidance are avaiabe on the FRC website at 30

37 APPENDIX OVERLAP BETWEEN THE DISCLOSURE AND TRANSPARENCY RULES AND THE COMBINED CODE DISCLOSURE AND TRANSPARENCY RULES D.T.R R Sets out minimum requirements on composition of the audit committee or equivaent body. D.T.R R Sets out minimum functions of the audit committee or equivaent body. D.T.R R The composition and function of the audit committee or equivaent body must be discosed in the annua report DTR R states that compiance with Code provisions A.1.2, C.3.1, C.3.2 and C.3.3 wi resut in compiance with DTR R to DTR R. D.T.R R The corporate governance statement must incude a description of the main features of the company s interna contro and risk management systems in reation to the financia reporting process. Whie this requirement differs from the requirement in the Combined Code, it is envisaged that both coud be met by a singe interna contro statement. COMBINED CODE Provision C.3.1 Sets out recommended composition of the audit committee. Provision C.3.2 Sets out the recommended minimum terms of reference for the committee. Provision A.1.2: The annua report shoud identify members of the board committees. Provision C.3.3 The annua report shoud describe the work of the audit committee. Further recommendations on the content of the audit committee report are set out in the Smith Guidance Provision C.2.1 The Board must report that a review of the effectiveness of the interna contro system has been carried out. Further recommendations on the content of the interna contro statement are set out in the Turnbu Guidance. 31

38 DTR R The corporate governance statement must incude a description of the composition and operation of the administrative, management and supervisory bodies and their committees. DTR R states that compiance with Code provisions A.1.1, A.1.2, A.4.6, B.2.1 and C.3.3 with resut in compiance with DTR R. This requirement overaps with a number of different provisions of the Code: A.1.1: the annua report shoud incude a statement of how the board operates. A.1.2: the annua report shoud identify members of the board and board committees. A.4.6: the annua report shoud describe the work of the nomination committee. B.2.1: a description of the work of the remuneration committee shoud be made avaiabe. [Note: in order to compy with DTR R this information wi need to be incuded in the corporate governance statement]. C.3.3: the annua report shoud describe the work of the audit committee. 32

39 Financia Reporting Counci 2008 ISBN: The Financia Reporting Counci Limited is a company imited by guarantee. Registered in Engand number Registered Office: 5th Foor, Adwych House, Adwych, London WC2B 4HN.

40 Financia Reporting Counci 5th Foor Adwych House Adwych London WC2B 4HN Te: +44 (0) fax: +44 (0) Website: UP/FRC-B18016