UK: FRC review of the Combined Code - LSE submission

The London Stock Exchange has published its submission to the FRC's review of the Combined Code on Corporate Governance: see here. In preparing its submission, the LSE sought feedback from a sample of companies (the sample size is not disclosed) and this found "no substantive evidence for wholesale changes to the Code". The LSE nevertheless states that there are some areas which demand further attention, including:

Shareholder engagement. Measures to encourage increased and direct engagement by major shareholders beyond the annual general meeting period would be welcomed. Engagement of such investors with the non-executive directors in particular should be encouraged.

Risk management. In light of challenging economic conditions, boards seem to be adapting their approach to risk management. Operational risks are extensively reviewed, but the financial crisis has highlighted the need to consider contingency planning for ‘high impact/very low probability’ macro risks, which may warrant further guidance.

Non-executive directors. Given the additional focus on the non-executive director role, the FRC might consider reviewing the determination of independence within the Code as a way to help expand the associated non-executive director recruitment pool and to allow more flexibility for companies with widely differing business models to balance the need for independence with the need for sector expertise. An example raised included potentially reviewing the nine-year threshold when determining whether or not a non-executive was ‘independent’. Additionally, there would seem to be merit in creating guidance as to the qualities needed for an effective non-executive chairman capable of challenging the executive directors. Lastly, given the strategic role played by non-executive directors, the need for companies to ensure that they are properly informed in a timely fashion was reinforced, although mandating a separate company secretariat was not supported, which would be expensive and unwieldy for smaller companies particularly.

Positioning of the Code. There is a need to reassert the Code’s authority in light of certain third party interpretations, publications and commentary which have introduced confusion to the corporate governance debate.