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New governance standards for UK companies split investors

New governance standards for UK-listed companies looks set to split investors over the FRC’s proposals that the 350 largest companies should propose all their directors for annual election.

The UK Corporate Governance Code, formerly known as the Combined Code, sets out standards of governance for listed companies. Companies are required either to follow the Code or explain how else they are acting to promote good governance.

There are 6 key areas of focus for boards which the FRC hopes will help companies become more effective and accountable to their shareholders:

  1. Risk Management: A company‘s business model should be explained and the board should be responsible for determining the nature and extent of the significant risks it is willing to take.
  2. Pay for Performance: Performance-related pay should be aligned to the long-term interests of the company and its risk policy and systems.
  3. Accountability to Shareholders: To increase accountability, all directors of FTSE 350 companies should be put forward for re-election every year.
  4. Leadership Principles: To promote proper debate in the boardroom, there are new principles on the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
  5. Board Diversity: To encourage boards to be well balanced and avoid “group think” there are new principles on the composition and selection of the board, including the need to appoint members on merit, against objective criteria, and with due regard for the benefits of diversity, including gender diversity.
  6. Board Performance: To help enhance the board’s performance and awareness of its strengths and weaknesses, the chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.

But the accountability to shareholders proposals have provoked sharp criticism from both companies and shareholders.

One of the UK’s leading pension funds, USS has openly stated that it views the FRC’s proposals as engendering a short-term outlook. Commenting on the announcement of the new Code, Dr Daniel Summerfield said that at a time when the focus should be on encouraging a longer-term approach towards stewardship, the proposals could have the opposite effect: “Shareholders in UK companies already have the requisite tools to hold directors to account as they have the rights and means to remove a director from the board even if that individual is not standing for re-election in that year. The move towards annual elections therefore appears to be a solution to a problem that does not exist.”

UK company law is particularly pro-shareholder on director elections. Unlike the US where even majority voting has failed to dislodge directors after they have lost a ballot, under UK law, directors must vacate their office. Historic voting trends on director voting have also shown that even the most unpopular CEOs rarely achieve less that 90% support.  Board insulation/classified boards are unheard of in the UK and each director stands for re-election every three years. Which was not always the case. Even in the mid (0s, many companies articles of association only required on third of the board to retire by rotation which allowed some directors to never be re-proposed after their initial election.

Some of the larger FTSE100 companies with dual US/UK listing have started to propose all directors annually (Thomson Reuters for example). Sweden is also cited as an example of another market with annual elections. But neither of those jurisdictions are directly comparable either in terms of company law or shareholders’r rights.  In Sweden, directors are usually elected utilising the plurality voting system for elections as the default provision, although the general meeting may choose to adopt a majority vote standard. Plurality voting denotes that the candidates with highest number votes are appointed to the vacancies on the Board and does not require the election of directors to receive majority of favourable votes to pass.

The annual election proposals appear to sit at odds with the proposals for tri-ennial external performance reviews.

But given that a UK company cannot be left without directors, it remains to be seen how these proposals can be implemented.


To read the new Code in full visit:


What do you think?