New rules will curb executive excess

2003

The Financial Reporting Council (FRC) has drawn up a revised version of the Combined Code of Corporate Governance that incorporates the majority of Derek Higgs' controversial recommendations on enhancing the role of non-executive directors in UK boardrooms.

The new code is intended to restore investor confidence following a flood of ‘fat cat’ scandals and corporate failures such as Enron and Worldcom.

But the new code takes a less prescriptive approach than business groups had feared, allowing companies to explain any departure from the code in their annual report rather than threatening them with sanctions for non-compliance.

The FRC has also dropped some of Mr Higgs’s more controversial provisions, notably the suggestion that a company chairman should be banned from chairing the nominations committee.

"This is a victory for common sense," said Digby Jones, head of the Confederation of British Industry (CBI).

"The FRC has delivered a code that will encourage better corporate governance but not have damaging unintended consequences."

A CBI survey in March showed more than 80 per cent of chairmen at Britain’s top 100 companies felt the original proposals would make it hard for them to run their boards effectively.

The Association of British Insurers, which represents institutional investors who make up a fifth of all shareholders, also said that the revised proposals would appease criticism that the new rules would be too prescriptive.

Mr Higgs said: "I am very pleased that the new code incorporates virtually all the 50 recommendations of my review and has the backing of leading shareholder and company bodies alike."

However the code, which comes into effect from November 2003, makes specific guidance on executive pay and includes a provision urging boards to "avoid rewarding poor performance".

Board members will be urged to "take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss".

And in response to the furore around the ‘golden goodbyes’ paid to failed executives, the code urges boards to "take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss".

The notice or contract period for executives should be one year or less, while executive share options should not be offered at a discount.

Other measures include provisions that an individual cannot normally be both chief executive and chairman of the same firm and that a chief executive should not go on to become the chairman; extending the length of time non-executive directors can serve from six to nine years; and a strengthening of a company's audit committee to ensure the integrity of company accounts.

"The code has the potential to make Britain's boardrooms work better," said TUC chairman Brendan Barber.

"It is now up to businesses to turn good words into good practise."