Financial Reporting Council
June 2008
The C ombined C ode on C orporate G overnance
THE COMBINED CODE ON
代写留学生论文CORPORATE GOVERNANCE
June 2008
CONTENTS
Pages
The Combined Code on Corporate Governance
Preamble 1-3
Section 1 COMPANIES 5-20
A Directors 5-12
B Remuneration 13-15
C Accountability and Audit 16-18
D Relations with Shareholders 19-20
Section 2 INSTITUTIONAL SHAREHOLDERS 21-22
E Institutional Shareholders 21-22
Schedule A Provisions on the design of performance related
remuneration 23
Schedule B Guidance on liability of non-executive directors: care,
skill and diligence 24
Schedule C Disclosure of corporate governance arrangements 25-32
CODE ON CORPORATE GOVERNANCE
PREAMBLE
1. Good corporate governance should contribute to better company
performance by helping a board discharge its duties in the bestinterests of shareholders; if it is ignored, the consequence may well be
vulnerability or poor performance. Good governance should facilitateefficient, effective and entrepreneurial management that can delivershareholder value over the longer term. The Combined Code on
Corporate Governance (‘the Code’) is published by the FRC to supportthese outcomes and promote confidence in corporate reporting andgovernance.
2. The Code is not a rigid set of rules. Rather, it is a guide to the componentsof good board practice distilled from consultation and widespread
experience over many years. While it is expected that companies willcomply wholly or substantially with its provisions, it is recognised that noncompliance
may be justified in particular circumstances if goodgovernance can be achieved by other means. A condition of noncompliance
is that the reasons for it should be explained to shareholders,who may wish to discuss the position with the company and whose votingintentions may be influenced as a result. This ‘comply or explain’ approachas been in operation since the Code’s beginnings in 1992 and theflexibility it offers is valued by company boards and by investors in
pursuing better corporate governance.
3. The Listing Rules require UK companies listed on the Main Market of the
London Stock Exchange to describe in the annual report and accounts
their corporate governance from two points of view, the first dealing
generally with their adherence to the Code’s main principles, and the
second dealing specifically with non-compliance with any of the Code’s
provisions. The descriptions together should give shareholders a clear
and comprehensive picture of a company’s governance arrangements in
relation to the Code as a criterion of good practice.
4. In relation to the requirement to state how it has applied the Code’s main
principles, where a company has done so by complying with the
associated provisions it should be sufficient simply to report that this is
the case; copying out the principles in the annual report adds to its length
without adding to its value. But where a company has taken additional
actions to apply the principles or otherwise improve its governance, it
would be helpful to shareholders to describe these in the annual report.
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5. If a company chooses not to comply with one or more provisions of the
Code, it must give shareholders a careful and clear explanation which
shareholders should evaluate on its merits. In providing an explanation,
the company should aim to illustrate how its actual practices are
consistent with the principle to which the particular provision relates and
contribute to good governance.
6. Smaller listed companies, in particular those new to listing, may judge that
some of the provisions are disproportionate or less relevant in their case.
Some of the provisions do not apply to companies below the FTSE 350.
Such companies may nonetheless consider that it would be appropriate to
adopt the approach in the Code and they are encouraged to do so.
Externally managed investment companies typically have a different board
structure, which may affect the relevance of particular provisions; the
Association of Investment Companies’s Corporate Governance Code and
Guide can assist them in meeting their obligations under the Code.
7. In their turn, shareholders should pay due regard to companies’ individual
circumstances and bear in mind in particular the size and complexity of the
company and the nature of the risks and challenges it faces. Whilst
shareholders have every right to challenge companies’ explanations if they
are unconvincing, they should not be evaluated in a mechanistic way and
departures from the Code should not be automatically treated as
breaches. Institutional shareholders should be careful to respond to the
statements from companies in a manner that supports the ‘comply or
explain’ principle and bearing in mind the purpose of good corporate
governance. They should put their views to the company and be prepared
to enter a dialogue if they do not accept the company’s position.
Institutional shareholders should be prepared to put such views in writing
where appropriate.
8. Companies and shareholders have a shared responsibility for ensuring
that ‘comply or explain’ remains an effective alternative to a rules-based
system. Satisfactory engagement between company boards and investors
is therefore crucial to the health of the UK’s corporate governance regime.
Although engagement has been improving slowly but steadily for many
years, practical obstacles necessitate a constant effort to keep the
improvement going.
9. Companies can make a major contribution by spreading governance
discussion with shareholders outside the two peak annual reporting
periods around 31st December and 31st March and by raising further the
general standard of their explanations justifying non-compliance.
Shareholders for their part can still do more to satisfy companies that
they devote adequate resources and scrutiny to engagement.
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10. References to shareholders in this Preamble also apply to intermediaries
and agents employed to assist shareholders in scrutinising governance
arrangements.
11. This edition of the Code applies to accounting periods beginning on or
after 29 June 2008, and takes effect at the same time as new FSA
Corporate Governance Rules implementing European requirements
relating to audit committees and corporate governance statements. The
relevant sections of these Rules are summarised in Schedule C. There is
some overlap between the content of the Code and the Rules, and the
Rules state that in these areas compliance with the Code will be deemed
sufficient also to comply with the Rules. However, where a company
chooses to explain rather than comply with the Code it will need to
demonstrate that it nonetheless meets the minimum requirements set out
in the Rules.
12. The Code itself is subject to periodic reviews by the FRC, the latest of
which was conducted in 2007 and was generally reassuring about the
Code’s content and impact. In the normal course of events the next review
will take place in 2010.
Financial Reporting Council
June 2008
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CODE OF BEST PRACTICE
SECTION 1 COMPANIES
A. DIRECTORS
A.1 The Board
Main Principle
Every company should be headed by an effective board, which is
collectively responsible for the success of the company.
Supporting Principles
The board’s role is to provide entrepreneurial leadership of the company
within a framework of prudent and effective controls which enables risk to
be assessed and managed. The board should set the company’s
strategic aims, ensure that the necessary financial and human resources
are in place for the company to meet its objectives and review
management performance. The board should set the company’s values
and standards and ensure that its obligations to its shareholders and
others are understood and met.
All directors must take decisions objectively in the interests of the
company.
As part of their role as members of a unitary board, non-executive
directors should constructively challenge and help develop proposals on
strategy. Non-executive directors should scrutinise the performance of
management in meeting agreed goals and objectives and monitor the
reporting of performance. They should satisfy themselves on the integrity
of financial information and that financial controls and systems of risk
management are robust and defensible. They are responsible for
determining appropriate levels of remuneration of executive directors
and have a prime role in appointing, and where necessary removing,
executive directors, and in succession planning.
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Code Provisions
A.1.1 The board should meet sufficiently regularly to discharge its duties
effectively. There should be a formal schedule of matters specifically
reserved for its decision. The annual report should include a statement of
how the board operates, including a high level statement of which types
of decisions are to be taken by the board and which are to be delegated
to management.
A.1.2 The annual report should identify the chairman, the deputy chairman
(where there is one), the chief executive, the senior independent director
and the chairmen and members of the nomination, audit and
remuneration committees. It should also set out the number of
meetings of the board and those committees and individual attendance
by directors1.
A.1.3 The chairman should hold meetings with the non-executive directors
without the executives present. Led by the senior independent director,
the non-executive directors should meet without the chairman present at
least annually to appraise the chairman’s performance (as described in
A.6.1) and on such other occasions as are deemed appropriate.
A.1.4 Where directors have concerns which cannot be resolved about the
running of the company or a proposed action, they should ensure that
their concerns are recorded in the board minutes. On resignation, a nonexecutive
director should provide a written statement to the chairman, for
circulation to the board, if they have any such concerns.
A.1.5 The company should arrange appropriate insurance cover in respect of
legal action against its directors.
A.2 Chairman and chief executive
Main Principle
There should be a clear division of responsibilities 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.
Supporting Principle
The chairman is responsible for leadership of the board, ensuring its
effectiveness on all aspects of its role and setting its agenda. The
1 Provisions A.1.1 and A.1.2 overlap with FSA Rule DTR 7.2.7 R; Provision A.1.2 also overlaps with DTR
7.1.5 R (see Schedule C).
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chairman is also responsible for ensuring that the directors receive
accurate, timely and clear information. The chairman should ensure
effective communication with shareholders. The chairman should also
facilitate the effective contribution of non-executive directors in particular
and ensure constructive relations between executive and non-executive
directors.
Code Provisions
A.2.1 The roles of chairman and chief executive should not be exercised by the
same individual. The division of responsibilities between the chairman
and chief executive should be clearly established, set out in writing and
agreed by the board.
A.2.2 The chairman should on appointment meet the independence criteria set
out in A.3.1 below. A chief executive should not go on to be chairman of
the same company. If exceptionally a board decides that a chief executive
should become chairman, the board should consult major shareholders
in advance and should set out its reasons to shareholders at the time of
the appointment and in the next annual report2.
A.3 Board balance and independence
Main Principle
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.
Supporting Principles
The board should not be so large as to be unwieldy. The board should be
of sufficient size that the balance of skills and experience is appropriate
for the requirements of the business and that changes to the board’s
composition can be managed without undue disruption.
To ensure that power and information are not concentrated in one or two
individuals, there should be a strong presence on the board of both
executive and non-executive directors.
The value of ensuring that committee membership is refreshed and that
undue reliance is not placed on particular individuals should be taken into
account in deciding chairmanship and membership of committees.
2 Compliance or otherwise with this provision need only be reported for the year in which the appointment
is made
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No one other than the committee chairman and members is entitled to be
present at a meeting of the nomination, audit or remuneration committee,
but others may attend at the invitation of the committee.
Code provisions
A.3.1 The board should identify in the annual report each non-executive
director it considers to be independent3. The board should determine
whether the director is independent in character and judgement and
whether there are relationships or circumstances which are likely to
affect, or could appear to affect, the director’s judgement. The board
should state its reasons if it determines that a director is independent
notwithstanding the existence of relationships or circumstances which
may appear relevant to its determination, including if the director:
l has been an employee of the company or group within the last five
years;
l has, or has had within the last three years, a material business
relationship with the company either directly, or as a partner,
shareholder, director or senior employee of a body that has such a
relationship with the company;
l has received or receives additional remuneration from the company
apart from a director’s fee, participates in the company’s share
option or a performance-related pay scheme, or is a member of the
company’s pension scheme;
l has close family ties with any of the company’s advisers, directors or
senior employees;
l holds cross-directorships or has significant links with other directors
through involvement in other companies or bodies;
l represents a significant shareholder; or
l has served on the board for more than nine years from the date of
their first election.
A.3.2 Except for smaller companies4, at least half the board, excluding the
chairman, should comprise non-executive directors determined by the
board to be independent. A smaller company should have at least two
independent non-executive directors.
A.3.3 The board should appoint one of the independent non-executive
directors to be the senior independent director. The senior
independent director should be available to shareholders if they have
3 A.2.2 states that the chairman should, on appointment, meet the independence criteria set out in this
provision, but thereafter the test of independence is not appropriate in relation to the chairman.
4 A smaller company is one that is below the FTSE 350 throughout the year immediately prior to the
reporting year.
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concerns which contact through the normal channels of chairman, chief
executive or finance director has failed to resolve or for which such
contact is inappropriate.
A.4 Appointments to the Board
Main Principle
There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board.
Supporting Principles
Appointments to the board should be made on merit and against
objective criteria. Care should be taken to ensure that appointees have
enough time available to devote to the job. This is particularly important in
the case of chairmanships.
The board should satisfy itself that plans are in place for orderly
succession for appointments to the board and to senior management, so
as to maintain an appropriate balance of skills and experience within the
company and on the board.
Code Provisions
A.4.1 There should be a nomination committee which should lead the process
for board appointments and make recommendations to the board. A
majority of members of the nomination committee should be independent
non-executive directors. The chairman or an independent non-executive
director should chair the committee, but the chairman should not chair
the nomination committee when it is dealing with the appointment of a
successor to the chairmanship. The nomination committee should make
available5 its terms of reference, explaining its role and the authority
delegated to it by the board.
A.4.2 The nomination committee should evaluate the balance of skills,
knowledge and experience on the board and, in the light of this
evaluation, prepare a description of the role and capabilities required for
a particular appointment.
A.4.3 For the appointment of a chairman, the nomination committee should
prepare a job specification, including an assessment of the time
commitment expected, recognising the need for availability in the event
of crises. A chairman’s other significant commitments should be
5 The requirement to make the information available would be met by including the information on a
website that is maintained by or on behalf of the company.
June 2008 The Combined Code
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disclosed to the board before appointment and included in the annual
report. Changes to such commitments should be reported to the board
as they arise, and their impact explained in the next annual report.
A.4.4 The terms and conditions of appointment of non-executive directors
should be made available for inspection6. The letter of appointment
should set out the expected time commitment. Non-executive directors
should undertake that they will have sufficient time to meet what is
expected of them. Their other significant commitments should be
disclosed to the board before appointment, with a broad indication of
the time involved and the board should be informed of subsequent
changes.
A.4.5 The board should not agree to a full time executive director taking on
more than one non-executive directorship in a FTSE 100 company nor
the chairmanship of such a company.
A.4.6 A separate section of the annual report should describe the work of the
nomination committee, including the process it has used in relation to
board appointments7. An explanation should be given if neither an
external search consultancy nor open advertising has been used in the
appointment of a chairman or a non-executive director.
A.5 Information and professional development
Main Principle
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 induction on joining the board and
should regularly update and refresh their skills and knowledge.
Supporting Principles
The chairman is responsible for ensuring that the directors receive
accurate, timely and clear information. Management has an obligation to
provide such information but directors should seek clarification or
amplification where necessary.
The chairman should ensure that the directors continually update their
skills and the knowledge and familiarity with the company required to fulfil
their role both on the board and on board committees. The company
6 The terms and conditions of appointment of non-executive directors should be made available for
inspection by any person at the company’s registered office during normal business hours and at the AGM
(for 15 minutes prior to the meeting and during the meeting).
7 This provision overlaps with FSA Rule DTR 7.2.7 R (see Schedule C).
June 2008 The Combined Code
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should provide the necessary resources for developing and updating its
directors’ knowledge and capabilities.
Under the direction of the chairman, the company secretary’s
responsibilities include ensuring good information flows within the
board and its committees and between senior management and nonexecutive
directors, as well as facilitating induction and assisting with
professional development as required.
The company secretary should be responsible for advising the board
through the chairman on all governance matters.
Code Provisions
A.5.1 The chairman should ensure that new directors receive a full, formal and
tailored induction on joining the board. As part of this, the company
should offer to major shareholders the opportunity to meet a new nonexecutive
director.
A.5.2 The board should ensure that directors, especially non-executive
directors, have access to independent professional advice at the
company’s expense where they judge it necessary to discharge their
responsibilities as directors. Committees should be provided with
sufficient resources to undertake their duties.
A.5.3 All directors should have access to the advice and services of the
company secretary, who is responsible to the board for ensuring that
board procedures are complied with. Both the appointment and removal
of the company secretary should be a matter for the board as a whole.
A.6 Performance evaluation
Main Principle
The board should undertake a formal and rigorous annual evaluation
of its own performance and that of its committees and individual
directors.
Supporting Principle
Individual evaluation should aim to show whether each director continues
to contribute effectively and to demonstrate commitment to the role
(including commitment of time for board and committee meetings and any
other duties). The chairman should act on the results of the performance
evaluation by recognising the strengths and addressing the weaknesses
of the board and, where appropriate, proposing new members be
appointed to the board or seeking the resignation of directors.
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Code Provision
A.6.1 The board should state in the annual report how performance evaluation
of the board, its committees and its individual directors has been
conducted. The non-executive directors, led by the senior independent
director, should be responsible for performance evaluation of the
chairman, taking into account the views of executive directors.
A.7 Re-election
Main Principle
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.
Code Provisions
A.7.1 All directors should be subject to election by shareholders at the first
annual general meeting after their appointment, and to re-election
thereafter at intervals of no more than three years. The names of
directors submitted for election or re-election should be accompanied by
sufficient biographical details and any other relevant information to
enable shareholders to take an informed decision on their election.
A.7.2 Non-executive directors should be appointed for specified terms subject
to re-election and to Companies Acts provisions relating to the removal of
a director. The board should set out to shareholders in the papers
accompanying a resolution to elect a non-executive director why they
believe an individual should be elected. The chairman should confirm to
shareholders when proposing re-election that, following formal
performance evaluation, the individual’s performance continues to be
effective and to demonstrate commitment to the role. Any term beyond
six years (e.g. two three-year terms) for a non-executive director should
be subject to particularly rigorous review, and should take into account
the need for progressive refreshing of the board. Non-executive directors
may serve longer than nine years (e.g. three three-year terms), subject to
annual re-election. Serving more than nine years could be relevant to the
determination of a non-executive director’s independence (as set out in
provision A.3.1).
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B. REMUNERATION
B.1 The Level and Make-up of Remuneration
Main Principles
Levels of remuneration should be sufficient to attract, retain and
motivate 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 executive
directors’ remuneration should be structured so as to link rewards to
corporate and individual performance.
Supporting Principle
The remuneration committee should judge where to position their
company relative to other companies. But they should use such
comparisons with caution, in view of the risk of an upward ratchet of
remuneration levels with no corresponding improvement in performance.
They should also be sensitive to pay and employment conditions
elsewhere in the group, especially when determining annual salary
increases.
Code Provisions
Remuneration policy
B.1.1 The performance-related elements of remuneration should form a
significant proportion of the total remuneration package of executive
directors and should be designed to align their interests with those of
shareholders and to give these directors keen incentives to perform at the
highest levels. In designing schemes of performance-related
remuneration, the remuneration committee should follow the provisions
in Schedule A to this Code.
B.1.2 Executive share options should not be offered at a discount save as
permitted by the relevant provisions of the Listing Rules.
B.1.3 Levels of remuneration for non-executive directors should reflect the time
commitment and responsibilities of the role. Remuneration for nonexecutive
directors should not include share options. If, exceptionally,
options are granted, shareholder approval should be sought in advance
and any shares acquired by exercise of the options should be held until at
least one year after the non-executive director leaves the board. Holding
of share options could be relevant to the determination of a non-executive
director’s independence (as set out in provision A.3.1).
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B.1.4 Where a company releases an executive director to serve as a nonexecutive
director elsewhere, the remuneration report8 should include a
statement as to whether or not the director will retain such earnings and, if
so, what the remuneration is.
Service Contracts and Compensation
B.1.5 The remuneration committee should carefully consider what
compensation commitments (including pension contributions and all
other elements) their directors’ terms of appointment would entail in the
event of early termination. The aim should be to avoid rewarding poor
performance. They should take a robust line on reducing compensation
to reflect departing directors’ obligations to mitigate loss.
B.1.6 Notice or contract periods should be set at one year or less. If it is
necessary to offer longer notice or contract periods to new directors
recruited from outside, such periods should reduce to one year or less
after the initial period.
B.2 Procedure
Main Principle
There should be a formal and transparent procedure for developing
policy on executive remuneration and for fixing the remuneration
packages of individual directors. No director should be involved in
deciding his or her own remuneration.
Supporting Principles
The remuneration committee should consult the chairman and/or chief
executive about their proposals relating to the remuneration of other
executive directors. The remuneration committee should also be
responsible for appointing any consultants in respect of executive
director remuneration. Where executive directors or senior
management are involved in advising or supporting the remuneration
committee, care should be taken to recognise and avoid conflicts of
interest.
The chairman of the board should ensure that the company maintains
contact as required with its principal shareholders about remuneration in
the same way as for other matters.
8 As required under the Directors’ Remuneration Report Regulations 2002.
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Code Provisions
B.2.1 The board should establish a remuneration committee of at least three, or
in the case of smaller companies9 two, independent non-executive
directors. In addition the company chairman may also be a member of,
but not chair, the committee if he or she was considered independent on
appointment as chairman. The remuneration committee should make
available10 its terms of reference, explaining its role and the authority
delegated to it by the board. Where remuneration consultants are
appointed, a statement should be made available11 of whether they have
any other connection with the company.
B.2.2 The remuneration committee should have delegated responsibility for
setting remuneration for all executive directors and the chairman,
including pension rights and any compensation payments. The
committee should also recommend and monitor the level and structure
of remuneration for senior management. The definition of ‘senior
management’ for this purpose should be determined by the board but
should normally include the first layer of management below board level.
B.2.3 The board itself or, where required by the Articles of Association, the
shareholders should determine the remuneration of the non-executive
directors within the limits set in the Articles of Association. Where
permitted by the Articles, the board may however delegate this
responsibility to a committee, which might include the chief executive.
B.2.4 Shareholders should be invited specifically to approve all new long-term
incentive schemes (as defined in the Listing Rules) and significant
changes to existing schemes, save in the circumstances permitted by the
Listing Rules.
9 See footnote 4.
10 This provision overlaps with FSA Rule DTR 7.2.7 R (see Schedule C).
11 See footnote 5.
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C. ACCOUNTABILITY AND AUDIT
C.1 Financial Reporting
Main Principle
The board should present a balanced and understandable
assessment of the company’s position and prospects.
Supporting Principle
The board’s responsibility to present a balanced and understandable
assessment extends to interim and other price-sensitive public reports
and reports to regulators as well as to information required to be
presented by statutory requirements.
Code Provisions
C.1.1 The directors should explain in the annual report their responsibility for
preparing the accounts and there should be a statement by the auditors
about their reporting responsibilities.
C.1.2 The directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary.
C.2 Internal Control12
Main Principle
The board should maintain a sound system of internal control to
safeguard shareholders’ investment and the company’s assets.
Code Provision
C.2.1 The board should, at least annually, conduct a review of the effectiveness
of the group’s system of internal controls and should report to
shareholders that they have done so13. The review should cover all
material controls, including financial, operational and compliance
controls and risk management systems.
12 The Turnbull guidance suggests means of applying this part of the Code. Copies are available at
www.frc.org.uk/corporate/internalcontrol.cfm
13 In addition FSA Rule DTR 7.2.5 R requires companies to describe the main features of the internal control
and risk management systems in relation to the financial reporting process (see Schedule C).
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C.3 Audit Committee and Auditors14
Main Principle
The board should establish formal and transparent arrangements for
considering how they should apply the financial reporting and
internal control principles and for maintaining an appropriate
relationship with the company’s auditors.
Code provisions
C.3.1 The board should establish an audit committee of at least three, or in the
case of smaller companies15 two, independent non-executive directors. In
smaller companies the company chairman may be a member of, but not
chair, the committee in addition to the independent non-executive
directors, provided he or she was considered independent on
appointment as chairman. The board should satisfy itself that at least
one member of the audit committee has recent and relevant financial
experience16.
C.3.2 The main role and responsibilities of the audit committee should be set
out in written terms of reference and should include17:
l to monitor the integrity of the financial statements of the company,
and any formal announcements relating to the company’s financial
performance, reviewing significant financial reporting judgements
contained in them;
l to review the company’s internal financial controls and, unless
expressly addressed by a separate board risk committee composed
of independent directors, or by the board itself, to review the
company’s internal control and risk management systems;
l to monitor and review the effectiveness of the company’s internal
audit function;
l to make recommendations to the board, for it to put to the
shareholders for their approval in general meeting, in relation to the
appointment, re-appointment and removal of the external auditor and
to approve the remuneration and terms of engagement of the
external auditor;
l to review and monitor the external auditor’s independence and
objectivity and the effectiveness of the audit process, taking into
consideration relevant UK professional and regulatory requirements;
14 The Smith guidance suggests means of applying this part of the Code. Copies are available at
www.frc.org.uk/corporate/auditcommittees.cfm
15 See footnote 4.
16 This provision overlaps with FSA Rule DTR 7.1.1 R (see Schedule C).
17 This provision overlaps with FSA Rules DTR 7.1.3 R (see Schedule C).
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l to develop and implement policy on the engagement of the external
auditor to supply non-audit services, taking into account relevant
ethical guidance regarding the provision of non-audit services by the
external audit firm; and to report to the board, identifying any matters
in respect of which it considers that action or improvement is needed
and making recommendations as to the steps to be taken.
C.3.3 The terms of reference of the audit committee, including its role and the
authority delegated to it by the board, should be made available18. A
separate section of the annual report should describe the work of the
committee in discharging those responsibilities19.
C.3.4 The audit committee should review arrangements by which staff of the
company may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters. The
audit committee’s objective should be to ensure that arrangements are in
place for the proportionate and independent investigation of such matters
and for appropriate follow-up action.
C.3.5 The audit committee should monitor and review the effectiveness of the
internal audit activities. Where there is no internal audit function, the audit
committee should consider annually whether there is a need for an
internal audit function and make a recommendation to the board, and the
reasons for the absence of such a function should be explained in the
relevant section of the annual report.
C.3.6 The audit committee should have primary responsibility for making a
recommendation on the appointment, reappointment and removal of the
external auditors. If the board does not accept the audit committee’s
recommendation, it should include in the annual report, and in any
papers recommending appointment or re-appointment, a statement from
the audit committee explaining the recommendation and should set out
reasons why the board has taken a different position.
C.3.7 The annual report should explain to shareholders how, if the auditor
provides non-audit services, auditor objectivity and independence is
safeguarded.
18 See footnote 5.
19 This provision overlaps with FSA Rules DTR 7.1.5 R and 7.2.7 R (see Schedule C).
June 2008 The Combined Code
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D. RELATIONS WITH SHAREHOLDERS
D.1 Dialogue with Institutional Shareholders
Main Principle
There should be a dialogue with shareholders based on the mutual
understanding of objectives. The board as a whole has responsibility
for ensuring that a satisfactory dialogue with shareholders takes
place20.
Supporting Principles
Whilst recognising that most shareholder contact is with the chief
executive and finance director, the chairman (and the senior independent
director and other directors as appropriate) should maintain sufficient
contact with major shareholders to understand their issues and concerns.
The board should keep in touch with shareholder opinion in whatever
ways are most practical and efficient.
Code Provisions
D.1.1 The chairman should ensure that the views of shareholders are
communicated to the board as a whole. The chairman should discuss
governance and strategy with major shareholders. Non-executive
directors should be offered the opportunity to attend meetings with
major shareholders and should expect to attend them if requested by
major shareholders. The senior independent director should attend
sufficient meetings with a range of major shareholders to listen to their
views in order to help develop a balanced understanding of the issues
and concerns of major shareholders.
D.1.2 The board should state in the annual report the steps they have taken to
ensure that the members of the board, and in particular the non-executive
directors, develop an understanding of the views of major shareholders
about their company, for example through direct face-to-face contact,
analysts’ or brokers’ briefings and surveys of shareholder opinion.
20 Nothing in these principles or provisions should be taken to override the general requirements of law to
treat shareholders equally in access to information.
June 2008 The Combined Code
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D.2 Constructive Use of the AGM
Main Principle
The board should use the AGM to communicate with investors and to
encourage their participation.
Code Provisions
D.2.1 At any general meeting, the company should propose a separate
resolution on each substantially separate issue, and should in particular
propose a resolution at the AGM relating to the report and accounts. For
each resolution, proxy appointment forms should provide shareholders
with the option to direct their proxy to vote either for or against the
resolution or to withhold their vote. The proxy form and any
announcement of the results of a vote should make it clear that a ’vote
withheld’ is not a vote in law and will not be counted in the calculation of
the proportion of the votes for and against the resolution.
D.2.2 The company should ensure that all valid proxy appointments received
for general meetings are properly recorded and counted. For each
resolution, after a vote has been taken, except where taken on a poll, the
company should ensure that the following information is given at the
meeting and made available as soon as reasonably practicable on a
website which is maintained by or on behalf of the company:
l the number of shares in respect of which proxy appointments
have been validly made;
l the number of votes for the resolution;
l the number of votes against the resolution; and
l the number of shares in respect of which the vote was directed
to be withheld.
D.2.3 The chairman should arrange for the chairmen of the audit, remuneration
and nomination committees to be available to answer questions at the
AGM and for all directors to attend.
D.2.4 The company should arrange for the Notice of the AGM and related
papers to be sent to shareholders at least 20 working days before the
meeting.
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SECTION 2 INSTITUTIONAL SHAREHOLDERS
E. INSTITUTIONAL SHAREHOLDERS21
E.1 Dialogue with companies
Main Principle
Institutional shareholders should enter into a dialogue with
companies based on the mutual understanding of objectives.
Supporting Principles
Institutional shareholders should apply the principles set out in the
Institutional Shareholders’ Committee’s ‘‘The Responsibilities of
Institutional Shareholders and Agents – Statement of Principles’’22,
which should be reflected in fund manager contracts.
E.2 Evaluation of Governance Disclosures
Main Principle
When evaluating companies’ governance arrangements, particularly
those relating to board structure and composition, institutional
shareholders should give due weight to all relevant factors drawn to
their attention.
Supporting Principle
Institutional shareholders should consider carefully explanations given
for departure from this Code and make reasoned judgements in each
case. They should give an explanation to the company, in writing where
appropriate, and be prepared to enter a dialogue if they do not accept the
company’s position. They should avoid a box-ticking approach to
assessing a company’s corporate governance. They should bear in
mind in particular the size and complexity of the company and the nature
of the risks and challenges it faces.
21 Agents such as investment managers, or voting services, are frequently appointed by institutional
shareholders to act on their behalf and these principles should accordingly be read as applying where
appropriate to the agents of institutional shareholders.
22 Available at www.institutionalshareholderscommittee.co.uk.
June 2008 The Combined Code
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E.3 Shareholder Voting
Main Principle
Institutional shareholders have a responsibility to make considered
use of their votes.
Supporting Principles
Institutional shareholders should take steps to ensure their voting
intentions are being translated into practice.
Institutional shareholders should, on request, make available to their
clients information on the proportion of resolutions on which votes were
cast and non-discretionary proxies lodged.
Major shareholders should attend AGMs where appropriate and
practicable. Companies and registrars should facilitate this.
June 2008 The Combined Code
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Schedule A: Provisions on the design of performance
related remuneration
1. The remuneration committee should consider whether the directors
should be eligible for annual bonuses. If so, performance conditions
should be relevant, stretching and designed to enhance shareholder
value. Upper limits should be set and disclosed. There may be a case for
part payment in shares to be held for a significant period.
2. The remuneration committee should consider whether the directors
should be eligible for benefits under long-term incentive schemes.
Traditional share option schemes should be weighed against other kinds
of long-term incentive scheme. In normal circumstances, shares granted
or other forms of deferred remuneration should not vest, and options
should not be exercisable, in less than three years. Directors should be
encouraged to hold their shares for a further period after vesting or
exercise, subject to the need to finance any costs of acquisition and
associated tax liabilities.
3. Any new long-term incentive schemes which are proposed should be
approved by shareholders and should preferably replace any existing
schemes or at least form part of a well considered overall plan,
incorporating existing schemes. The total rewards potentially available
should not be excessive.
4. Payouts or grants under all incentive schemes, including new grants
under existing share option schemes, should be subject to challenging
performance criteria reflecting the company’s objectives. Consideration
should be given to criteria which reflect the company’s performance
relative to a group of comparator companies in some key variables such
as total shareholder return.
5. Grants under executive share option and other long-term incentive
schemes should normally be phased rather than awarded in one large
block.
6. In general, only basic salary should be pensionable.
7. The remuneration committee should consider the pension consequences
and associated costs to the company of basic salary increases and any
other changes in pensionable remuneration, especially for directors close
to retirement.
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Schedule B: Guidance on liability of non-executive
directors: care, skill and diligence
1. Although non-executive directors and executive directors have as board
members the same legal duties and objectives, the time devoted to the
company’s affairs is likely to be significantly less for a non-executive
director than for an executive director and the detailed knowledge and
experience of a company’s affairs that could reasonably be expected of a
non-executive director will generally be less than for an executive
director. These matters may be relevant in assessing the knowledge, skill
and experience which may reasonably be expected of a non-executive
director and therefore the care, skill and diligence that a non-executive
director may be expected to exercise.
2. In this context, the following elements of the Code may also be
particularly relevant.
(i) In order to enable directors to fulfil their duties, the Code states
that:
l The letter of appointment of the director should set out the
expected time commitment (Code provision A.4.4); and
l 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. The chairman is responsible for ensuring
that the directors are provided by management with accurate,
timely and clear information. (Code principle A.5).
(ii) Non-executive directors should themselves:
l Undertake appropriate induction and regularly update and
refresh their skills, knowledge and familiarity with the company
(Code principle A.5 and provision A.5.1)
l Seek appropriate clarification or amplification of information
and, where necessary, take and follow appropriate
professional advice. (Code principle A.5 and provision A.5.2)
l Where they have concerns about the running of the company
or a proposed action, ensure that these are addressed by the
board and, to the extent that they are not resolved, ensure that
they are recorded in the board minutes (Code provision A.1.4).
l Give a statement to the board if they have such unresolved
concerns on resignation (Code provision A.1.4)
3. It is up to each non-executive director to reach a view as to what is
necessary in particular circumstances to comply with the duty of care,
skill and diligence they owe as a director to the company. In considering
whether or not a person is in breach of that duty, a court would take into
account all relevant circumstances. These may include having regard to
the above where relevant to the issue of liability of a non-executive
director.
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Schedule C: Disclosure of Corporate Governance
Arrangements
Corporate governance disclosure requirements are set out in three places:
l FSA Listing Rule 9.8.6 (which includes the ‘comply or explain’
requirement);
l FSA Disclosure and Transparency Rules Sections 7.1 and 7.2 (which
set out certain mandatory disclosures); and
l The Combined Code (in addition to providing an explanation where
they choose not to comply with a provision, companies must
disclose specified information in order to comply with certain
provisions).
These requirements are summarised below. The full text of Listing Rule 9.8.6
and Disclosure and Transparency Rules 7.1 and 7.2 are contained in the Listing,
Prospectus and Disclosure section of the FSA Handbook, which can be found at
http://fsahandbook.info/FSA/html/handbook/.
There is some overlap between the mandatory disclosures required under the
Disclosure and Transparency Rules and those expected under the Combined
Code. Areas of overlap are summarised in the Appendix to this Schedule. In
respect of disclosures relating to the audit committee and the composition and
operation of the board and its committees, compliance with the relevant
provisions of the Code will result in compliance with the relevant Rules.
Listing Rules
Paragraph 9.8.6 R of the Listing Rules states that in the case of a listed company
incorporated in the United Kingdom, the following items must be included in its
annual report and accounts:
l a statement of how the listed company has applied the Main
Principles set out in Section 1 of the Combined Code, in a manner
that would enable shareholders to evaluate how the principles have
been applied;
l a statement as to whether the listed company has:
l complied throughout the accounting period with all relevant
provisions set out in Section 1 of the Combined Code; or
l not complied throughout the accounting period with all relevant
provisions set out in Section 1 of the Combined Code and if so,
setting out:
(i) those provisions, if any, it has not complied with;
June 2008 The Combined Code
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(ii) in the case of provisions whose requirements are of a
continuing nature, the period within which, if any, it did not
comply with some or all of those provisions; and
(iii) the company’s reasons for non-compliance.
Disclosure and Transparency Rules
Section 7.1 of the Disclosure and Transparency Rules concerns audit
committees or bodies carrying out equivalent functions.
DTR 7.1.1 R to 7.1.3 R sets out requirements relating to the composition and
functions of the committee or equivalent body:
l DTR 7.1.1 R states that an issuer must have a body which is
responsible for performing the functions set out in DTR 7.1.3 R, and
that at least one member of that body must be independent and at
least one member must have competence in accounting and/or
auditing.
l DTR 7.1.2 G states that the requirements for independence and
competence in accounting and/or auditing may be satisfied by the
same member or by different members of the relevant body.
l DTR 7.1.3 R states that an issuer must ensure that, as a minimum,
the relevant body must:
(1) monitor the financial reporting process;
(2) monitor the effectiveness of the issuer’s internal control, internal
audit where applicable, and risk management systems;
(3) monitor the statutory audit of the annual and consolidated
accounts;
(4) review and monitor the independence of the statutory auditor,
and in particular the provision of additional services to the
issuer.
DTR 7.1.5 R to 7.1.7 R explain what disclosure is required:
l DTR 7.1.5 R states that the issuer must make a statement available to
the public disclosing which body carries out the functions required
by DTR 7.1.3 R and how it is composed.
l DTR 7.1.6 G states that this can be included in the corporate
governance statement required under DTR 7.2 (see below).
l DTR 7.1.7 R states that compliance with the relevant provisions of the
Combined Code (as set out in the Appendix to this Schedule) will
result in compliance with DTR 7.1.1 R to 7.1.5 R.
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Section 7.2 concerns corporate governance statements. Issuers are required to
produce a corporate governance statement that must be either included in the
directors’ report (DTR 7.2.1 R); or in a separate report published together with
the annual report; or on the issuer’s website, in which case there must be a
cross-reference in the directors’ report (DTR 7.2.9 R).
DTR 7.2.2 R requires that the corporate governance statements must contain a
reference to the corporate governance code to which the company is subject
(for listed companies incorporated in the UK this is the Combined Code). DTR
7.2.3 R requires that, to the extent that it departs from that code, the company
must explain which parts of the code it departs from and the reasons for doing
so. DTR 7.2.4 G states that compliance with LR 9.8.6R (6) (the ‘comply or
explain’ rule in relation to the Combined Code) will also satisfy these
requirements.
DTR 7.2.5 R to 7.2.7 R and DTR 7.2.10 R set out certain information that must be
disclosed in the corporate governance statement:
l DTR 7.2.5 R states that the corporate governance statement must
contain a description of the main features of the company’s internal
control and risk management systems in relation to the financial
reporting process. DTR 7.2.10 R states that an issuer which is
required to prepare a group directors’ report within the meaning of
Section 415(2) of the Companies Act 2006 must include in that report
a description of the main features of the group’s internal control and
risk management systems in relation to the process for preparing
consolidated accounts.
l DTR 7.2.6 R states that the corporate governance statement must
contain the information required by paragraph 13(2)(c), (d), (f), (h)
and (i) of Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (SI 2008/410)
where the issuer is subject to the requirements of that paragraph.
l DTR 7.2.7 R states that the corporate governance statement must
contain a description of the composition and operation of the issuer’s
administrative, management and supervisory bodies and their
committees. DTR 7.2.8 G states that compliance with the relevant
provisions of the Combined Code (as set out in the Appendix to this
Schedule) will satisfy the requirements of DTR 7.2.7 R.
June 2008 The Combined Code
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The Combined Code
In addition the Code includes specific requirements for disclosure which are set
out below:
The annual report should record:
l a statement of how the board operates, including a high level
statement of which types of decisions are to be taken by the board
and which are to be delegated to management (A.1.1);
l the names of the chairman, the deputy chairman (where there is
one), the chief executive, the senior independent director and the
chairmen and members of the nomination, audit and remuneration
committees (A.1.2);
l the number of meetings of the board and those committees and
individual attendance by directors (A.1.2);
l the names of the non-executive directors whom the board
determines to be independent, with reasons where necessary
(A.3.1);
l the other significant commitments of the chairman and any changes
to them during the year (A.4.3);
l how performance evaluation of the board, its committees and its
directors has been conducted (A.6.1);
l the steps the board has taken to ensure that members of the board,
and in particular the non-executive directors, develop an
understanding of the views of major shareholders about their
company (D.1.2).
The annual report should also include:
l a separate section describing the work of the nomination committee,
including the process it has used in relation to board appointments
and an explanation if neither external search consultancy nor open
advertising has been used in the appointment of a chairman or a
non-executive director (A.4.6);
l a description of the work of the remuneration committee as required
under the Directors’ Remuneration Report Regulations 2002, and
including, where an executive director serves as a non-executive
director elsewhere, whether or not the director will retain such
earnings and, if so, what the remuneration is (B.1.4);
l an explanation from the directors of their responsibility for preparing
the accounts and a statement by the auditors about their reporting
responsibilities (C.1.1);
June 2008 The Combined Code
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l a statement from the directors that the business is a going concern,
with supporting assumptions or qualifications as necessary (C.1.2);
l a report that the board has conducted a review of the effectiveness of
the group’s system of internal controls (C.2.1);
l a separate section describing the work of the audit committee in
discharging its responsibilities (C.3.3);
l where there is no internal audit function, the reasons for the absence
of such a function (C.3.5);
l where the board does not accept the audit committee’s
recommendation on the appointment, reappointment or removal of
an external auditor, a statement from the audit committee explaining
the recommendation and the reasons why the board has taken a
different position (C.3.6); and
l an explanation of how, if the auditor provides non-audit services,
auditor objectivity and independence is safeguarded (C.3.7).
The following information should be made available (which may be met by
placing the information on a website that is maintained by or on behalf of the
company):
l the terms of reference of the nomination, remuneration and audit
committees, explaining their role and the authority delegated to them
by the board (A.4.1, B.2.1 and C.3.3);
l the terms and conditions of appointment of non-executive directors
(A.4.4) (see footnote 8 on page 10); and
l where remuneration consultants are appointed, a statement of
whether they have any other connection with the company (B.2.1).
The board should set out to shareholders in the papers accompanying a
resolution to elect or re-elect directors:
l sufficient biographical details to enable shareholders to take an
informed decision on their election or re-election (A.7.1);
l why they believe an individual should be elected to a non-executive
role (A.7.2); and
l on re-election of a non-executive director, confirmation from the
chairman that, following formal performance evaluation, the
individual’s performance continues to be effective and to
demonstrate commitment to the role, including commitment of time
for board and committee meetings and any other duties (A.7.2).
June 2008 The Combined Code
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The board should set out to shareholders in the papers recommending
appointment or reappointment of an external auditor:
/l if the board does not accept the audit committee’s recommendation,
a statement from the audit committee explaining the
recommendation and from the board setting out reasons why they
have taken a different position (C.3.6).
Additional guidance
The Turnbull Guidance and Smith Guidance contain further suggestions as to
information that might usefully be disclosed in the internal control statement and
the report of the audit committee respectively. Both sets of guidance are
available on the FRC website at http://www.frc.org.uk/corporate/.
June 2008 The Combined Code
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APPENDIX
OVERLAP BETWEEN THE DISCLOSURE AND TRANSPARENCY
RULES AND THE COMBINED CODE
DISCLOSURE AND
TRANSPARENCY RULES
COMBINED CODE
D.T.R 7.1.1 R
Sets out minimum requirements on
composition of the audit committee
or equivalent body.
Provision C.3.1
Sets out recommended composition
of the audit committee.
D.T.R 7.1.3 R
Sets out minimum functions of the
audit committee or equivalent body.
Provision C.3.2
Sets out the recommended minimum
terms of reference for the committee.
D.T.R 7.1.5 R
The composition and function of the
audit committee or equivalent body
must be disclosed in the annual
report
DTR 7.1.7 R states that compliance
with Code provisions A.1.2, C.3.1,
C.3.2 and C.3.3 will result in
compliance with DTR 7.1.1 R to
DTR 7.1.5 R.
Provision A.1.2:
The annual report should identify
members of the board committees.
Provision C.3.3
The annual report should describe
the work of the audit committee.
Further recommendations on the
content of the audit committee report
are set out in the Smith Guidance
D.T.R 7.2.5 R
The corporate governance statement
must include a description of the
main features of the company’s
internal control and risk
management systems in relation to
the financial reporting process.
While this requirement differs from
the requirement in the Combined
Code, it is envisaged that both could
be met by a single internal control
statement.
Provision C.2.1
The Board must report that a review
of the effectiveness of the internal
control system has been carried out.
Further recommendations on the
content of the internal control
statement are set out in the Turnbull
Guidance.
June 2008 The Combined Code
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DTR 7.2.7 R
The corporate governance statement
must include a description of the
composition and operation of the
administrative, management and
supervisory bodies and their
committees.
DTR 7.2.8 R states that compliance
with Code provisions A.1.1, A.1.2,
A.4.6, B.2.1 and C.3.3 with result in
compliance with DTR 7.2.7 R.
This requirement overlaps with a
number of different provisions of the
Code:
A.1.1: the annual report should
include a statement of how the board
operates.
A.1.2: the annual report should
identify members of the board and
board committees.
A.4.6: the annual report should
describe the work of the nomination
committee.
B.2.1: a description of the work of
the remuneration committee should
be made available. [Note: in order to
comply with DTR 7.2.7 R this
information will need to be included
in the corporate governance
statement].
C.3.3: the annual report should
describe the work of the audit
committee.
June 2008 The Combined Code
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© Financial Reporting Council 2008
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