20 years on from the introduction of the first version of the Combined Code on Corporate Goverance and following its biennial review and consultation process earlier this year, on 28 September the Financial Reporting Council (“FRC”) published some amendments to the Corporate Governance Code (the “Code”). The amended Code will apply for accounting periods beginning on or after 1 October 2012. The Code applies to all companies with a Premium listing on the London Stock Exchange and to companies with securities admitted to trading on the Main Securities Market of the Irish Stock Exchange.
The changes to the Code focus on giving greater insight into the conduct of Boards and Audit Committees and include the following:
- 10 Year Tenders for Audit Contract: FTSE 350 companies (ISE equivalent is companies admitted to trading on the MSM) are now required to put their external audit contract out to tender at least every 10 years. The FRC has stressed that this is not mandatory rotation of auditors by another name and clarified that if, as a result of the tendering process, a company judges the incumbent auditor to be providing the best quality and most effective audit, they should reappoint that firm. The FRC intends to conduct a consultation process and may provided further guidance in the coming months on tendering. To avoid a flood of companies putting their audit contract out to tender over the next 12 months or so, the FRC has posted on its website suggested transitional arrangements for this new requirement – suggesting that the timing of tenders might be aligned with both the cycle for rotating the audit engagement partner and the length of time since the audit contract was previously put out to tender
- “Comply or Explain” – Fuller Explanations: Companies are to provide fuller explanations to shareholders as to why they choose not to follow a provision of the Code, giving background to and a clear rationale for such choices
- Board Diversity: Companies are to explain, and report on progress with, their policies on boardroom diversity, including gender, and any measurable objectives the Board has set for implementing policy. This change was first announced in October 2011, but its implementation was deferred to avoid piecemeal changes to the Code
- Assessment of External Audit Process: Audit Committees are to provide information in the annual report on how they have assessed the effectiveness of the external audit process. Previously the Code merely required a confirmation that the committee believed the external audit was effective
- Annual Report “Fair, Balanced and Understandable”: Boards are to confirm that the annual report and accounts taken as a whole are fair, balanced and understandable, and to ensure that the narrative sections of the report are consistent with the financial statements and accurately reflect the company’s performance
- External Consultants & Advisors: Companies are to disclose the idenity and details of any other connection with the company of executive search consultants, board reviewers/evaluators and remuneration consultants used by the company
The FRC has also published an updated edition of its Guidance on Audit Committees to reflect the changes to the Code.
Changes have also been made to the Stewardship Code including: clarification of asset managers’ and asset owners’ responsibilities for stewardship; encouragement of asset managers to have the processes that support their stewardship activities independently verified; and investors should provide clear explanations as to how they manage of conflicts of interest.
These changes are also effective from 1 October 2012.
Contributed by Ita O’Sullivan
