Directors will face annual re-election under new Corporate Governance Code

All directors of FTSE 350 companies will soon be expected to submit themselves for re-election annually, under new best practice guidelines on corporate governance published last week. For financial years beginning on or after 29 June 2010, all companies with a Premium Listing of equity shares on the Main Market of the London Stock Exchange will be expected to report against their compliance with the 2010 version of the Combined Code on Corporate Governance – which has been renamed the UK Corporate Governance Code – published by the Financial Reporting Council on 28 May.

Under the 2010 Code:

•All directors of FTSE 350 companies (but not smaller listed companies) will be expected to stand for re-election every year. (Currently annual re-election is required only for NEDs with more than nine years’ service, although a few very large companies have chosen to put the whole board up for re-election every year.) The FRC decided to introduce this requirement despite strong arguments being made against it by some companies and business organisations, and despite the fact that even among ABI and NAPF members opinions are divided on whether it is a good idea. The FRC believes that the requirement creates “a strong incentive to understand and respond to shareholders’ concerns before the AGM”. Some companies and other organisations have claimed that activist, short-term or single-issue investors may use the threat of a vote against one or more directors to drive forward their own agenda, or that individual directors may be blamed unfairly for decisions taken collectively by the board, but the FRC considers these concerns to be overstated. Empirical evidence also suggests that most investors will use the power to vote against a director sparingly.
•FTSE 350 companies will be expected to arrange externally-facilitated board reviews at least every three years. (At present, board reviews should be conducted annually, but there is no requirement to use external facilitators.) However, scepticism about the effectiveness of external facilitators, and the fact that presently there are only a few organisations with sufficient quality and experience to perform such a role, could mean that companies are slow to comply with this new requirement.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.