Overview

On 28 May 2010 the Financial Reporting Council published a revised corporate governance code. This follows the review of the effectiveness of the Combined Code carried out by the FRC in 2009/10. It has been renamed the UK Corporate Governance Code and will apply to accounting periods beginning on or after 29 June 2010.

The FRC has not found evidence of serious failings in the governance of British business outside the banking sector. The consensus view is that the Code remains fit for purpose and the absence of dramatic changes to it reflects this. Instead a prime objective of the FRC review has been to refocus attention on the underlying principles of the Code, which should take precedence over its detailed provisions. The aim is to remind companies and institutional investors that the Code should be seen as a means of promoting appropriate behaviour by boards and good communication between boards and shareholders rather than merely a compliance exercise.

The revisions are also designed to reinforce board quality and debate, the importance of risk management and accountability to shareholders. In return, the proposed new Stewardship Code, which will set out standards of good governance for institutional investors, is expected to bring advances in responsible engagement by shareholders. The FRC are aiming to publish the Stewardship Code by the end of June 2010.

Taken together, hopefully the two Codes will bring about an improved governance environment with a decline in both boilerplate reporting by companies and box-ticking by investors. Whether this happens will depend on the approach taken by companies, institutional investors and proxy voting agencies when the new codes come into force.

This article reviews the key changes and their implications, and flags up some forthcoming corporate governance developments. Click ‘View Briefing’ to read it.