Possible Amendments to the Combined Code
Comments from ACCA
April 2006
ACCA's is pleased to comment on the FRC's consultation on Possible Amendments to the Combined Code.
As we said in our comments in October 2005 on the last Combined Code consultation, we believe that the Code is having a broadly positive impact but we had some specific concerns with some of its requirements and with how they are interpreted.
Our concerns centred on:
- the independence requirements for non-executive directors which are challenging for smaller listed companies,
- how companies generally do not report fully on how they apply all the Code's principles and
- on how some directors and others seem to view corporate governance as a compliance exercise rather than something relevant to strategy and business performance.
We are very pleased that proposed change 'D' regarding the Listing Rule requirement for companies to report how they apply Code principles should help to address the second concern above. We are optimistic that the greater attention given to principles and performance rather than structural elements and compliance, which should result from this change, will also address our two other concerns.
DETAILED COMMENTS ON THE PROPOSED CHANGES
We have the following comments on each of the proposed changes:
A. amending provision B.2.1 to allow the chairman to sit on the remuneration committee where he or she was considered independent at the time of appointment
We support the proposed change. The chairman is responsible and accountable for the strategic direction of the company, overall performance and for the reward system for achievement and failure. It is therefore appropriate that a chairman, who is considered independent at the time of appointment, should be able to be a member of the remuneration committee. We emphasise that, in the consideration of independence, the real issue to decide should be whether the individual has independence of mind.
He/she should not chair the remuneration committee, however, and should take no part in setting his/her own remuneration.
B. amending section D.2 to provide shareholders voting by proxy with the option of withholding their vote, and to require the publication of details of proxies lodged at the AGM where votes are taken on a show of hands
As commented last October, we would support the inclusion of a 'vote withheld' box on the AGM proxy form if a withheld vote would count as a vote cast. We suggested however that the implications of this should be explored however as it could become harder to secure a positive vote.
C. for those provisions that require companies to "make information available" (provisions A.4.1, B.2.1 and C.3.3), enabling the requirement to be met by placing the information on the company's website
While a very small number of private investors still without access to the internet could potentially be disadvantaged by this minor deregulatory measure, the proposed amendment is sensible.
D. setting out in Schedule C the disclosure requirements in the Listing Rules in order to ensure companies are able to find details of all relevant requirements in one place
We strongly support efforts to ensure companies improve the quality of how they report on how they have applied the principles in the Combined Code. Arguably the Preamble to the Combined Code already makes clear the requirement for companies to report how they apply both the main and supporting principles. We accept, however, that in practice companies have not followed the spirit of this requirement. We trust the proposed change and the attention given to the issues by the FRC and by investors will be sufficient to encourage companies to improve reporting in this area.
We are pleased to have been involved in a project with Independent Audit involving investors and company representatives in producing a paper called 'Better Governance Reporting'. The paper was designed to encourage and help companies to report more effectively both how they are using governance in the strategic management of the business and how they have applied the principles.
We note these words from the first paragraphs of BP's 2005 Governance Report:
'The governance of companies continues to be under scrutiny. Regulators and commentators maintain their focus on structural elements. We believe too little attention is paid to the underlying purpose of governance. Governance lies at the heart of all the board does and it is the task our owners entrust to the board.
Governance is not an exercise in compliance nor is it a higher form of management. Governance is a more powerful concept. It has a clear objective: ensuring the pursuit of the company's purpose. The board's activity is focused on this task, which is unique to it as the representative of BP's owners.'
We believe such improved reporting, in particular reporting on how companies apply governance principles, is very important in helping companies, investors and other parties to move away from such a focus on the structural elements of governance to appreciating how good governance helps build long term value for shareholders.