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Financial directions – Code insists on ‘relevant’ experience

The appointments, most of which have been current or former FDs, have been made in a bid to meet the Combined Code’s requirement to have at least one member of their audit committee with “recent and relevant experience”.

The findings are part of Deloitte’s annual Board Structures and Policies survey, which focuses on how 75 FTSE-350 companies have coped with the recommendations of the Combined Code and other corporate governance legislation relating to the structure of boards.

Most of the respondents (65%) appointed non-executives during the past year from within the FTSE-350. Other notable sources of recruitment included non-UK companies (30%), lawyers, accountants or consultants (30%), and private companies (24%).

During the past year, only 27% of companies recruited women into non-executive roles, despite 55% stating last year that they were planning to recruit more female candidates.

Internally, 69% of companies surveyed actively encourage executive board members to take on a non-executive role at another company.

Deloitte says that the proportion of board changes has still been high over the past 12 months, with 73% of respondents making some change to their non-executive element and 49% having altered their executive element. A notable development is that more execs (32) have left boards than have been appointed (24). Yet 49 non-executive directors have been appointed, compared with 40 departures.

The Code states that at least half of the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. However, just 56% of respondents comply with this provision. In order to do so, the non-compliant boards would have to appoint 50 more non-executives, which equates to a 13% increase in non-executives. Another alternative would be to change the structure of the board. Deloitte believes more non-execs will be appointed, but the number of executive positions will also decrease over time.

Deloitte believes that the Code’s opinions on what makes a non-executive director not independent are likely to become the most accepted criteria by which most shareholders will judge the independence of new and existing non-executives.

However, many respondents disagree with the Code’s criteria. Some 77% of companies consider their non-executives to be independent, but just 55% consider them to be independent under the Code’s definition of the term. For example, a non-executive director is viewed by the Code as not independent if he has served on the board for more than nine years from the date of their first election. Only 52% of respondents agreed with this statement.

And three-quarters of organisations agree with the Code that a non-executive cannot be independent if he holds cross-directorships or has significant links with other directors through involvement in other companies or bodies.

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