Derek Higgs’ first draft of the revised Combined Code virtually doubled the number of provisions. Under the Listing Rules, provisions must be complied with, or if not, an explanation given. Paul Chisnall, an executive director at the British Bankers Association, says: “The overriding concern was that the Code had become less ‘comply or explain’ and more ‘comply or else’.”
Peter Wyman, a partner at PricewaterhouseCoopers and member of the Financial Reporting Council’s rewrite team, agrees the original version lacked the flexibility that Higgs himself wanted. “Once the Code was redrafted to allow that flexibility and to ensure that the ‘comply or explain’ approach would survive, people found they had very little they disagreed with – even though nothing of great substance had been changed,” Wyman says.
The FRC’s rewrite team redrafted most of the additional provisions as principles, creating a new category of “supporting principles”. Companies must explain in their own words how they have applied all these principles.
The result is that the Code has not been watered down, but softened. “Nothing was given away,” he says.
One aspect of Higgs’ draft, seen as misconceived, has been changed. Higgs’ original Code said that while the nomination committee could include the board chairman, it should be chaired by an independent non-executive. The revised Code says the board chairman may chair the nomination committee, except when dealing with the appointment of a successor to the chairmanship.
In other areas, the wording of the finalised Code clarifies certain confusion and softens the original. For example, the original Higgs draft contained a provision stating that a chief executive should not go on to become chairman of the same company. The redrafted Code takes the same stance, but has expanded the provision, setting out the procedures (such as consultation with major shareholders) that a board should take in the exceptional circumstance when it does decide the chief executive should subsequently become the chairman.
The redrafted Code also clarifies the position of non-executives who serve for longer periods. “The first version was read as placing an absolute limit of 10 years on non-executive directorships,” says Chisnall. “But there are many strong-minded people who are good, independent non-executive directors and it would be unfortunate if companies had to do without (them). In the final version of the Code, there’s an expectation of re-election after nine years, but the sense of prescription has been softened.”
Another widespread concern was that the original draft was creating a rival to the chairman in the senior independent director. The revised Code clarifies the roles, stating that the role of the chairman would not be undermined and that “debilitating boardroom divisions” would not be created.
One other notable change in the finalised Code is that a distinction is made between companies inside and outside the FTSE-350. The latter now don’t need as many independent non-executives on the board. Timothy Copnell, director of corporate governance at KPMG, disapproves. “To suddenly create a different hurdle for smaller companies seems to show a lack of confidence in the ‘comply or explain’ approach,” he says. “Furthermore, companies just falling outside the FTSE-350 are arguably the ones that need the tighter governance.”
Copnell is also concerned that, for all companies, the increase in the number of principles between the two drafts has worsened the reporting burden. “Companies must explain how they have applied the principles in such detail that shareholders can understand,” says Copnell. “If you are going to put meaningful words that distinguish your company from any other and avoid boilerplate disclosure, that will mean providing more information. This will just produce a lot more paper.”
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