FINANCIAL REPORTING COUNCIL THE UK CORPORATE GOVERNANCE CODE

Transcription

1 FINANCIAL REPORTING COUNCIL THE UK CORPORATE GOVERNANCE CODE JUNE 2010

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3 CONTENTS Pages Governance and the Code 1 Preface 2-3 Compy or Expain 4-5 The Main Principes of the Code 6-7 Section A: Leadership 9-11 Section B: Effectiveness Section C: Accountabiity Section D: Remuneration Section E: Reations with Sharehoders Schedue A: The design of performance-reated remuneration for executive directors 27 Schedue B: Discosure of corporate governance arrangements 28-35

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5 GOVERNANCE AND THE CODE 1. The purpose of corporate governance is to faciitate effective, entrepreneuria and prudent management that can deiver the ong-term success of the company. 2. The first version of the UK Code on Corporate Governance (the Code) was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is sti the cassic definition of the context of the Code: Corporate governance is the system by which companies are directed and controed. Boards of directors are responsibe for the governance of their companies. The sharehoders roe in governance is to appoint the directors and the auditors and to satisfy themseves that an appropriate governance structure is in pace. The responsibiities of the board incude setting the company s strategic aims, providing the eadership to put them into effect, supervising the management of the business and reporting to sharehoders on their stewardship. The board s actions are subject to aws, reguations and the sharehoders in genera meeting. 3. Corporate governance is therefore about what the board of a company does and how it sets the vaues of the company, and is to be distinguished from the day to day operationa management of the company by fu-time executives. 4. The Code is a guide to a number of key components of effective board practice. It is based on the underying principes of a good governance: accountabiity, transparency, probity and focus on the sustainabe success of an entity over the onger term. 5. The Code has been enduring, but it is not immutabe. Its fitness for purpose in a permanenty changing economic and socia business environment requires its evauation at appropriate intervas. The reviews preceding this one were in 2005 and The Preface, which shoud be regarded as an integra part of the Code, introduces the changes made in the current review. 6. The new Code appies to accounting periods beginning on or after 29 June 2010 and, as a resut of the new Listing Regime introduced in Apri 2010, appies to a companies with a Premium Listing of equity shares regardess of whether they are incorporated in the UK or esewhere. 1

6 PREFACE 1. The financia crisis which came to a head in triggered widespread reappraisa, ocay and internationay, of the governance systems which might have aeviated it. In the UK, Sir David Waker was asked to review the governance of banks and other financia institutions, and the FRC decided to bring forward the Code review schedued for 2010 so that corporate governance in other isted companies coud be assessed at the same time. 2. Two principa concusions were drawn by the FRC from its review. First, that much more attention needed to be paid to foowing the spirit of the Code as we as its etter. Secondy, that the impact of sharehoders in monitoring the Code coud and shoud be enhanced by better interaction between the boards of isted companies and their sharehoders. To this end, the FRC has assumed responsibiity for a stewardship code that wi provide guidance on good practice for investors. 3. Neary two decades of constructive usage have enhanced the prestige of the Code. Indeed, it seems that there is amost a beief that compying with the Code in itsef constitutes good governance. The Code, however, is of necessity imited to being a guide ony in genera terms to principes, structure and processes. It cannot guarantee effective board behaviour because the range of situations in which it is appicabe is much too great for it to attempt to mandate behaviour more specificay than it does. Boards therefore have a ot of room within the framework of the Code to decide for themseves how they shoud act. 4. To foow the spirit of the Code to good effect, boards must think deepy, thoroughy and on a continuing basis, about their overa tasks and the impications of these for the roes of their individua members. Absoutey key in this endeavour are the eadership of the chairman of a board, the support given to and by the CEO, and the frankness and openness of mind with which issues are discussed and tacked by a directors. 5. The chaenge shoud not be underrated. To run a corporate board successfuy is extremey demanding. Constraints on time and knowedge combine with the need to maintain mutua respect and openness between a cast of strong, abe and busy directors deaing with each other across the different demands of executive and non-executive roes. To achieve good governance requires continuing and high quaity effort. 2

7 6. The Code s function shoud be to hep boards discharge their duties in the best interests of their companies. The FRC in this review has focussed on changing the tone of the Code by making imited but significant changes to signa the importance of the genera principes which shoud guide board behaviours. It is to be hoped that these changes wi promote greater carity and understanding with regard to the tasks of a board and that communication with sharehoders wi be more effective as a resut. 7. Chairmen are encouraged to report personay in their annua statements how the principes reating to the roe and effectiveness of the board (in Sections A and B of the new Code) have been appied. Not ony wi this give investors a cearer picture of the steps taken by boards to operate effectivey but aso, by providing fuer context, it may make investors more wiing to accept expanations when a company chooses to expain rather than to compy with one or more provisions. Above a, the persona reporting on governance by chairmen as the eaders of boards might be a turning point in attacking the fungus of boier-pate which is so often the preferred and easy option in sensitive areas but which is dead communication. 8. The new Code recommends that, in the interests of greater accountabiity, a directors of FTSE 350 companies shoud be subject to annua reeection. As with a other provisions of the Code, companies are free to expain rather than compy if they beieve that their existing arrangements ensure proper accountabiity and underpin board effectiveness, or that a transitiona period is needed before they introduce annua re-eection. The boards of smaer companies are aso encouraged to consider their poicy on director re-eection. Financia Reporting Counci June

8 COMPLY OR EXPLAIN 1. The compy or expain approach is the trademark of corporate governance in the UK. It has been in operation since the Code s beginnings and is the foundation of the Code s fexibiity. It is strongy supported by both companies and sharehoders and has been widey admired and imitated internationay. 2. The Code is not a rigid set of rues. It consists of principes (main and supporting) and provisions. The Listing Rues require companies to appy the Main Principes and report to sharehoders on how they have done so. The principes are the core of the Code and the way in which they are appied shoud be the centra question for a board as it determines how it is to operate according to the Code. 3. It is recognised that an aternative to foowing a provision may be justified in particuar circumstances if good governance can be achieved by other means. A condition of doing so is that the reasons for it shoud be expained ceary and carefuy to sharehoders 1, who may wish to discuss the position with the company and whose voting intentions may be infuenced as a resut. In providing an expanation, the company shoud aim to iustrate how its actua practices are both consistent with the principe to which the particuar provision reates and contribute to good governance. 4. In their responses to expanations, 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. Sharehoders shoud be carefu to respond to the statements from companies in a manner that supports the compy or expain process and bearing in mind the purpose of good corporate governance. They shoud put their views to the company and both parties shoud be prepared to discuss the position. 1 References to sharehoders aso appy to intermediaries and agents empoyed to assist sharehoders in scrutinising governance arrangements. 4

9 5. 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 Corporate Governance Code and Guide can assist them in meeting their obigations under the Code. 6. Satisfactory engagement between company boards and investors is crucia to the heath of the UK s corporate governance regime. Companies and sharehoders both have responsibiity for ensuring that compy or expain remains an effective aternative to a rues-based system. There are practica and administrative obstaces to improved interaction between boards and sharehoders. But certainy there is aso scope for an increase in trust which coud generate a virtuous upward spira in attitudes to the Code and in its constructive use. 5

10 THE MAIN PRINCIPLES OF THE CODE Section A: Leadership Every company shoud be headed by an effective board which is coectivey responsibe for the ong-term success of the company. 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. The chairman is responsibe for eadership of the board and ensuring its effectiveness on a aspects of its roe. As part of their roe as members of a unitary board, non-executive directors shoud constructivey chaenge and hep deveop proposas on strategy. Section B: Effectiveness The board and its committees shoud have the appropriate baance of skis, experience, independence and knowedge of the company to enabe them to discharge their respective duties and responsibiities effectivey. There shoud be a forma, rigorous and transparent procedure for the appointment of new directors to the board. A directors shoud be abe to aocate sufficient time to the company to discharge their responsibiities effectivey. A directors shoud receive induction on joining the board and shoud reguary update and refresh their skis and knowedge. 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 board shoud undertake a forma and rigorous annua evauation of its own performance and that of its committees and individua directors. A directors shoud be submitted for re-eection at reguar intervas, subject to continued satisfactory performance. 6

11 Section C: Accountabiity The board shoud present a baanced and understandabe assessment of the company s position and prospects. The board is responsibe for determining the nature and extent of the significant risks it is wiing to take in achieving its strategic objectives. The board shoud maintain sound risk management and interna contro systems. The board shoud estabish forma and transparent arrangements for considering how they shoud appy the corporate reporting and risk management and interna contro principes and for maintaining an appropriate reationship with the company s auditor. Section D: Remuneration 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. 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. Section E: Reations with Sharehoders 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. The board shoud use the AGM to communicate with investors and to encourage their participation. 7

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13 SECTION A: LEADERSHIP A.1 The Roe of the Board Main Principe Every company shoud be headed by an effective board which is coectivey responsibe for the ong-term 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 act in what they consider to be the best interests of the company, consistent with their statutory duties 2. 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 board committees 3. It shoud aso set out the number of meetings of the board and its committees and individua attendance by directors. A.1.3 The company shoud arrange appropriate insurance cover in respect of ega action against its directors. 2 For directors of UK incorporated companies, these duties are set out in the Sections 170 to 177 of the Companies Act 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 B). 9

14 A.2 Division of Responsibiities 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. Code Provision 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.3 The Chairman Main Principe The chairman is responsibe for eadership of the board and ensuring its effectiveness on a aspects of its roe. Supporting Principe The chairman is responsibe for setting the board s agenda and ensuring that adequate time is avaiabe for discussion of a agenda items, in particuar strategic issues. The chairman shoud aso promote a cuture of openness and debate by faciitating the effective contribution of nonexecutive directors in particuar and ensuring constructive reations between executive and non-executive directors. The chairman is responsibe for ensuring that the directors receive accurate, timey and cear information. The chairman shoud ensure effective communication with sharehoders. Code Provision A.3.1 The chairman shoud on appointment meet the independence criteria set out in B.1.1 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 4. 4 Compiance or otherwise with this provision need ony be reported for the year in which the appointment is made. 10

15 A.4 Non-executive Directors Main Principe As part of their roe as members of a unitary board, non-executive directors shoud constructivey chaenge and hep deveop proposas on strategy. Supporting Principe 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. Code Provisions A.4.1 The board shoud appoint one of the independent non-executive directors to be the senior independent director to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director shoud be avaiabe to sharehoders if they have concerns which contact through the norma channes of chairman, chief executive or other executive directors has faied to resove or for which such contact is inappropriate. A.4.2 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 and on such other occasions as are deemed appropriate. A.4.3 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. 11

16 SECTION B: EFFECTIVENESS B.1 The Composition of the Board Main Principe The board and its committees shoud have the appropriate baance of skis, experience, independence and knowedge of the company to enabe them to discharge their respective duties and responsibiities effectivey. Supporting Principes The board shoud be of sufficient size that the requirements of the business can be met and that changes to the board s composition and that of its committees can be managed without undue disruption, and shoud not be so arge as to be unwiedy. The board shoud incude an appropriate combination 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. 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. 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 B.1.1 The board shoud identify in the annua report each non-executive director it considers to be independent 5. 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; 5 A.3.1 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. 12

17 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. B.1.2 Except for smaer companies 6, 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. B.2 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 The search for board candidates shoud be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, incuding gender. 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 and to ensure progressive refreshing of the board. 6 A smaer company is one that is beow the FTSE 350 throughout the year immediatey prior to the reporting year. 13

18 Code Provisions B.2.1 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 its terms of reference, expaining its roe and the authority deegated to it by the board 7. B.2.2 The nomination committee shoud evauate the baance of skis, experience, independence and knowedge on the board and, in the ight of this evauation, prepare a description of the roe and capabiities required for a particuar appointment. B.2.3 Non-executive directors shoud be appointed for specified terms subject to re-eection and to statutory provisions reating to the remova of a director. Any term beyond six years 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. B.2.4 A separate section of the annua report shoud describe the work of the nomination committee 8, incuding the process it has used in reation to board appointments. 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. B.3 Commitment Main Principe A directors shoud be abe to aocate sufficient time to the company to discharge their responsibiities effectivey. Code Provisions B.3.1 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 discosed to the board before appointment and incuded in the annua 7 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. 8 This provision overaps with FSA Rue DTR R (see Schedue B). 14

19 report. Changes to such commitments shoud be reported to the board as they arise, and their impact expained in the next annua report. B.3.2 The terms and conditions of appointment of non-executive directors shoud be made avaiabe for inspection 9. 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. B.3.3 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. B.4 Deveopment Main Principe A directors shoud receive induction on joining the board and shoud reguary update and refresh their skis and knowedge. Supporting Principes 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 shoud provide the necessary resources for deveoping and updating its directors knowedge and capabiities. To function effectivey, a directors need appropriate knowedge of the company and access to its operations and staff. Code Provisions B.4.1 The chairman shoud ensure that new directors receive a fu, forma and taiored induction on joining the board. As part of this, directors shoud avai themseves of opportunities to meet major sharehoders. B.4.2 The chairman shoud reguary review and agree with each director their training and deveopment needs. 9 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). 15

20 B.5 Information and Support 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. 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. 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 B.5.1 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. B.5.2 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. B.6 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 Principes The chairman shoud act on the resuts of the performance evauation by recognising the strengths and addressing the weaknesses of the board 16

21 and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors. 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). Code Provisions B.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. B.6.2 Evauation of the board of FTSE 350 companies shoud be externay faciitated at east every three years. A statement shoud be made avaiabe of whether an externa faciitator has any other connection with the company 10. B.6.3 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. B.7 Re-eection Main Principe A directors shoud be submitted for re-eection at reguar intervas, subject to continued satisfactory performance. Code Provisions B.7.1 A directors of FTSE 350 companies shoud be subject to annua eection by sharehoders. A other 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. Nonexecutive directors who have served onger than nine years shoud be subject to annua re-eection. 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. B.7.2 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. 10 See footnote 7 17

22 SECTION C: ACCOUNTABILITY C.1 Financia And Business 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 annua report and accounts, and there shoud be a statement by the auditor about their reporting responsibiities 11. C.1.2 The directors shoud incude in the annua report an expanation of the basis on which the company generates or preserves vaue over the onger term (the business mode) and the strategy for deivering the objectives of the company 12. C.1.3 The directors shoud report in annua and haf-yeary financia statements that the business is a going concern, with supporting assumptions or quaifications as necessary The requirement may be met by the discosures about the audit scope and the responsibiities of the auditor incuded, or referred to, in the auditor s report pursuant to the requirements in paragraph 16 of ISA (UK and Ireand) 700, The Auditor s Report on Financia Statements. Copies are avaiabe at: It woud be desirabe if the expanation were ocated in the same part of the annua report as the Business Review required by Section 417 of the Companies Act Guidance as to the matters that shoud be considered in an expanation of a business mode is provided in paragraphs 30 to 32 of the Accounting Standard Board s Reporting Statement: Operating And Financia Review. Copies are avaiabe at: 13 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 suggests means of appying this part of the Code. Copies are avaiabe at: 18

23 C.2 Risk Management and Interna Contro 14 Main Principe The board is responsibe for determining the nature and extent of the significant risks it is wiing to take in achieving its strategic objectives. The board shoud maintain sound risk management and interna contro systems. Code Provision C.2.1 The board shoud, at east annuay, conduct a review of the effectiveness of the company s risk management and interna contro systems and shoud report to sharehoders that they have done so 15. The review shoud cover a materia contros, incuding financia, operationa and compiance contros. C.3 Audit Committee and Auditors 16 Main Principe The board shoud estabish forma and transparent arrangements for considering how they shoud appy the corporate reporting and risk management and interna contro principes and for maintaining an appropriate reationship with the company s auditor. Code Provisions C.3.1 The board shoud estabish an audit committee of at east three, or in the case of smaer companies 17 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 18. C.3.2 The main roe and responsibiities of the audit committee shoud be set out in written terms of reference 19 and shoud incude: 14 The Turnbu guidance suggests means of appying this part of the Code. Copies are avaiabe at 15 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. 16 The FRC Guidance on Audit Committees suggests means of appying this part of the Code. Copies are avaiabe at: 17 See footnote This provision overaps with FSA Rue DTR R (see Schedue B). 19 This provision overaps with FSA Rues DTR R (see Schedue B). 19

24 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; 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 20.A separate section of the annua report shoud describe the work of the committee in discharging those responsibiities 21. 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. 20 See footnote This provision overaps with FSA Rues DTR R and R (see Schedue B). 20

25 C.3.6 The audit committee shoud have primary responsibiity for making a recommendation on the appointment, reappointment and remova of the externa auditor. 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. 21

26 SECTION D: REMUNERATION D.1 The Leve and Components of Remuneration Main Principe 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 performance-reated eements of executive directors remuneration shoud be stretching and designed to promote the ong-term success of the company. 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 D.1.1 In designing schemes of performance-reated remuneration for executive directors, the remuneration committee shoud foow the provisions in Schedue A to this Code. D.1.2 Where a company reeases an executive director to serve as a nonexecutive director esewhere, the remuneration report 22 shoud incude a statement as to whether or not the director wi retain such earnings and, if so, what the remuneration is. D.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 or other performance-reated eements. 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 22 As required for UK incorporated companies under the Large and Medium-Sized Companies and Groups (Accounts and Reports) Reguations

27 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 B.1.1). D.1.4 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. D.1.5 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. D.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. Code Provisions D.2.1 The board shoud estabish a remuneration committee of at east three, or in the case of smaer companies 23 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 23 See footnote 6. 23

28 avaiabe its terms of reference, expaining its roe and the authority deegated to it by the board 24. Where remuneration consutants are appointed, a statement shoud be made avaiabe 25 of whether they have any other connection with the company. D.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. D.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. D.2.4 Sharehoders shoud be invited specificay to approve a new ong-term incentive schemes (as defined in the Listing Rues 26 ) and significant changes to existing schemes, save in the circumstances permitted by the Listing Rues. 24 This provision overaps with FSA Rue DTR R (see Schedue B). 25 See footnote Listing Rues LR 9.4; avaiabe at 24

29 SECTION E: RELATIONS WITH SHAREHOLDERS E.1 Diaogue with 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 27. Supporting Principes Whist recognising that most sharehoder contact is with the chief executive and finance director, the chairman shoud ensure that a directors are made aware of their major sharehoders issues and concerns. The board shoud keep in touch with sharehoder opinion in whatever ways are most practica and efficient. Code Provisions E.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 schedued meetings with major sharehoders and shoud expect to attend meetings 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. E.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 nonexecutive directors, deveop an understanding of the views of major sharehoders about the company, for exampe through direct face-to-face contact, anaysts or brokers briefings and surveys of sharehoder opinion. 27 Nothing in these principes or provisions shoud be taken to override the genera requirements of aw to treat sharehoders equay in access to information. 25

30 E.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 E.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. E.2.2 The company shoud ensure that a vaid proxy appointments received for genera meetings are propery recorded and counted. For each resoution, where a vote has been taken on a show of hands, 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. E.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. E.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. 26

31 SCHEDULE A THE DESIGN OF PERFORMANCE-RELATED REMUNERATION FOR EXECUTIVE DIRECTORS 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 promote the ong-term success of the company. Upper imits shoud be set and discosed. There may be a case for part payment in shares to be hed for a significant period. 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. Executive share options shoud not be offered at a discount save as permitted by the reevant provisions of the Listing Rues. 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. 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 potentiay avaiabe rewards shoud not be excessive. 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, incuding non-financia performance metrics where appropriate. Remuneration incentives shoud be compatibe with risk poicies and systems. Grants under executive share option and other ong-term incentive schemes shoud normay be phased rather than awarded in one arge bock. Consideration shoud be given to the use of provisions that permit the company to recaim variabe components in exceptiona circumstances of misstatement or misconduct. In genera, ony basic saary shoud be pensionabe. 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. 27

32 SCHEDULE B DISCLOSURE OF CORPORATE GOVERNANCE ARRANGEMENTS Corporate governance discosure requirements are set out in three paces: FSA Discosure and Transparency Rues sub-chapters 7.1 and 7.2 (which set out certain mandatory discosures); FSA Listing Rues R, R, and 9.8.7A R (which incudes the compy or expain requirement); 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 Discosure and Transparency Rues 7.1 and 7.2 and Listing Rues R, R and 9.8.7A R are contained in the reevant chapters of the FSA Handbook, which can be found at The Discosure and Transparency Rues sub-chapters 7.1 and 7.2 appy to issuers whose securities are admitted to trading on a reguated market (this incudes a issuers with a Premium or Standard isting). The Listing Rues R, R and 9.8.7A R and UK Corporate Governance Code appy to issuers of Premium isted equity shares ony. There is some overap between the mandatory discosures required under the Discosure and Transparency Rues and those expected under the UK Corporate Governance 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. Discosure and Transparency Rues Sub-chapter 7.1 of the Discosure and Transparency Rues concerns audit committees or bodies carrying out equivaent functions. DTR R to R set out requirements reating to the composition and functions of the committee or equivaent body: DTR R states than 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. 28