The Institute of Chartered Secretaries and Administrators (ICSA) has published draft guidance on improving public company board effectiveness, as part of its review of the Higgs Review on Corporate Governance.
The Financial Reporting Council (FRC) commissioned the ICSA to review and update the Good Practice Suggestions from the Higgs Report that relate to non-executive directors. A previous ICSA consultation, in March 2010, revealed that there was overwhelming support for new guidance to help boards to understand and implement the Combined Code (now called the UK Corporate Governance Code). Consequently, on 29 July 2010, the ICSA published a new consultation paper on improving board effectiveness, which includes draft guidance to assist boards in implementing the Principles in Sections A (Leadership) and B (Effectiveness) of the Code.
This draft guidance makes a number of amendments to Higgs’ guidance, most notably by placing a greater emphasis on the role of the chair in creating an effective board. However, it also contains sections on several areas/issues that were not covered by Higgs’ guidance, including:
1. Role of the board. The board is expected to set the company’s values and standards, and ensure that it meets its obligations to shareholders and others;
2. Role of the senior independent director. He or she should be more prominent when the board is undergoing a period of stress, in order to maintain board and company stability;
3. Role of executive directors. The CEO should improve the standards of discussion in the boardroom, whilst executive directors should represent the owners of the business and encourage non-executives to probe proposals as an essential part of good governance;
4. Role of the company secretary. The company secretary should add value, particularly in relation to induction and development, and advise the board of any changes which could be made to governance procedures in order to improve the governance of the company;
5. Decision-making. The Board should provide clear policies and look at how good decision-making can best be facilitated;
6. Board composition. Companies should consider internal appointments for executive director posts, and prospective directors should conduct sufficient due diligence to ensure that they fully understand the company before joining its board;
7. Establishing and maintaining directors’ skills. The chair, new director and company secretary should work together to devise an effective induction programme and directors’ development programme; and
8. Communicating with shareholders and other stakeholders. The annual report and accounts should be regarded as the most important communication between the company and its shareholders, and should be used to clearly set out the company’s governance arrangements.
The consultation closes on 14 October 2010, and the ICSA will then submit the completed draft guidance to the FRC in November 2010, so that the FRC can publish the final guidance by the end of 2010. Although the UK Corporate Governance Code applies to companies with a premium listing of equity shares, the principles and ethics underlying the Code should be followed by a much wider class of company, given the duties and responsibilities to which all directors are subject. Take, for example, the fast growing private limited company which is attracting external funding and which is working towards a listing. Behaviour in line with the Code will make transformation smoother and its absence could even jeopardise pre-listing funding, as reputation is crucial to any legitimate funder associated with a company.