The Revised Combined Code for Corporate Governance

1. THE ORIGINS OF THE COMBINED CODE

The origins of the current Revised Combined Code stem from the report of the Committee on the financial Aspects of Corporate Governance (the Cadbury Report, 1992) to which was attached a Code of Best Practice. This was further developed through a series of re-workings including those of the Greenbury Committee, which made recommendations on executive pay and Code of Best Practice.

It was the decided that previous governance recommendations should be reviewed and brought together in a single code. The work was carried out under the chairmanship of Sir Ronald Hampel and culminated in the Final Report: Combined Code on Corporate Governance in 1998.

In 2002 Derek Higgs was asked to report on the role and effectiveness of non-executive directors. His report, published in January 2003, suggested amendments to the Combined Code. At the same time a committee under Sire Robert Smith reported on guidance for audit committees. The revised Combined Code which was issued in July 1993 by the Financial Reporting Council (FRC) took into account both reports,. It took effect for reporting periods beginning on or after 1 November 2003. The FRC intends to ensure that it remains relevant, and has established a committee that will keep it under review.

2. THE PURPOSE OF THE COMBINED CODE

All UK reports and codes, including the 2003 Combined Code (the code), have taken the 'comply or explain' approach. Although only quoted companies (those with a full London Stock Exchange listing) are obliged to report how they apply the Code principles and whether they comply with the Code provisions and, where they do not, explain their departures from the, the Code has had a noticeable wider impact on governance. This is true not just of non-quoted companies, but also of organisations outside the commercial corporate sector where parallel codes of governance are emerging. For a quoted company reporting on its application of the Code is one of its continuing obligations under the Listing Rules published b the UK Listing Authority (UKLS). Penalties for breach of the Listing Rules are the sanction for ignoring the Code.

The code is divided into main principles, supporting principles and provisions. For both main principles and supporting principles a company has to state whether the comply with the provisions or - where they do not - give an explanation. It is the Code provisions that contain the detail on matters such as separating of the role of chairman and chief executive, the ratio of non-executing directors and the composition of the main board committees.

The first principle of the Code states that: "Every company should have an effective board". The board's effectiveness is widely regarded as a prerequisite for sustained corporate success. The quality and effectiveness of directors determines the quality and effectiveness of the board. Formal processes for appointment, induction and development should be adopted. Effectiveness of the board and its individual members has to be assessed. The code states that no one individual should have unfettered powers of decision-making. It sets out how this can be avoided by splitting the roles of chairman and chief executive, and specifies what the role of the chairman should be. The code offers valuable guidance on the ratio of non-executive to executive directors and definitions of independence.

The text of the Code can be a useful starting point for non-quoted companies and other organisations in structuring their governance.

3. MAIN PRINCIPLES OF THE COMBINED CODE

3.1 DIRECTORS.

3.1.1 The board.
Every company should be headed by an effective board, which is collectively responsible for the success of the company.

3.1.2 Chairman and chief executive.
There should be a clear division of responsibility at the head of the company between the running of the board and the executive responsibility for the running of the company's business. No one individual should have unfettered powers of decision.

3.1.3 Board Balance and independence.
The board should include a balance of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board's decision taking.

3.1.4 Appointments to the board.
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.

3.1.5 Information and professional development.
The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. All directors should receive an induction on joining the board and should regularly update and refresh their skills and knowledge.

3.1.6 Performance evaluation.
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

3.1.7 Re-election.
All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board.

3.2. REMUNERATION

3.2.1 The level and make-up of remuneration.
Levels of remuneration should be sufficient to attract, retain and motivated directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of director's remuneration should be structured so as to link rewards to corporate and individual performance.

3.2.2 Procedure.
There should be a a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No directors should be involved in deciding this or her own remuneration.

3.3 ACCOUNTABILITY AND AUDIT

3.3.1 Financial Reporting.
The board should present a balanced and understandable assessment of the company's positions and prospects.

3.3.2 Internal Control.
The board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets.

3.3.3 Audit committee and auditors.
The board should establish formal and transparent arrangement for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company's auditors.

3.4 RELATIONS WITH SHAREHOLDERS

3.4.1 Dialogue with institutional shareholders.
There should be dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has a responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

3.4.2 Constructive use of AGM.
The board should use the AGM to communicate with investors and to encourage their participation.

3.5 INSTITUTIONAL SHAREHOLDERS

3.5.1 Dialogue with companies.
Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of the objectives.

3.5.2 Evaluation of governance disclosures.
When evaluating a company's governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention.

3.5.3 Shareholder voting.
Institutional shareholders have a responsibility to make considered use of their votes.