Editorial - October 2009

The Final Report on the 2009 review of the Combined Code (now called the UK Corporate Governance Code) included the announcement that the Financial Reporting Council (FRC) had commissioned the Institute of Chartered Secretaries and Administrators (ICSA) to work with others on its behalf to update as necessary the good practice guidance from the 2003 Higgs Report in the light of the proposed changes to the Code and economic and other developments.

As part of this remit, the FRC asked ICSA to consider whether additional guidance should be provided on a number of related issues raised in Sections A (Leadership) and B (Effectiveness) of the Code. The document is entitled 'Improving board effectiveness' and draft guidance was launched for public consultation by the ICSA at the end of July 2010.

According to the guidance, 'a well-designed decision-making process is one of the most important hallmarks of a strong board. When making decisions, boards should guard against the effects of a dominant personality, the existence of “no go” areas for non-executives and a poor line of sight to significant risk.' ICSA will submit a final text later in the year for adoption by the FRC as a replacement to the existing Higgs guidance.

The initial consultation, in March this year, revealed overwhelming support for short, non-prescriptive guidance to help improve board effectiveness. Generally, respondents considered the right areas had been identified in the consultation paper, with several key themes emerging from the submissions.

The most significant conclusion drawn from the consultation exercise was the need to emphasise the importance of the role of the chairman in delivering an effective board. Other significant themes included the importance of challenge in the boardroom; understanding and managing the key relationships between members of the board; the need for all board members to understand better their roles and responsibilities on the board; and the necessity for bespoke development of each board member to enhance his or her contribution.

The consultation exercise produced a range of evidence of poor decision-making, some of the examples leading to well-documented cases of value destruction. The steering group concluded that the guidance should cover the structure, mechanics and processes which lead to effective decision-making as well as other aspects of a board‘s duties and responsibilities. It was clear from the consultation responses that the guidance should also address the issue of diversity, and the way in which a range of perspectives and experiences in the boardroom can help create an effective dynamic of challenge.

In relation to the accountability and disclosure agenda, the consultation exercise highlighted the need for companies to demonstrate that their governance arrangements are appropriate to the business model. The Code makes clear in the preface that chairmen are encouraged to report personally in their annual statements on issues of board leadership and effectiveness. This should set the tone for the rest of the report. The steering group considers that there remains significant potential for disclosure practices to develop in a more tailored and personalised fashion, thus facilitating greater levels of engagement with institutional investors and other major stakeholders.

‘Having received a wide range of responses during the initial stage of the consultation, we are now strongly encouraging all involved to submit comments that will help us complete the task of delivering guidance that will have a real impact on board effectiveness in the UK,’ commented Sir John Egan, Chairman of the Steering Group, and Baroness Hogg, FRC Chairman, added ‘We are grateful to ICSA and the Steering Group for their work and look forward to the final text. The result should be guidance that will help boards apply the Governance Code in ways that deliver the most practical benefit.’

This second stage of the consultation ends on 14 October 2010. The full background and reports are available on the ICSA website at www.icsa.org.uk

Key issues covered by the draft guidance:

More emphasis on the role of the chairman as critical to building an effective board.
The importance of the board’s role in creating a high-performance culture which maximises the opportunities for value creation and minimises risk.
The need to create an environment of challenge in the boardroom.
The value for companies of well-informed and high-quality board decision-making.
Board composition and diversity as major factors in delivering an effective board.
The advantages of a good training and development programme designed to improve directors’ skills, experience and knowledge.
The benefits of regular board evaluation to explore how well the board is functioning.

<< GO BACK | August 2010 | ISSUE NO 198

<< GO BACK | TOP