Armstrong Bonham Carter Armstrong Bonham Carter, 1 Angel Court, EC2R 7HJ, England

Armstrong Bonham Carter's response to the Financial Reporting Council's consultation on the Revised UK Corporate Governance Code March 2010
Article by Tom Bonham Carter 04 Mar 2010

Armstrong Bonham Carter (ABC) is delighted to provide some views on the proposed revisions to the Combined Code of Corporate Governance which is to be renamed the UK Corporate Governance Code (Code) as requested by the Financial Reporting Council (FRC).

ABC agrees with the FRC in its introduction when it asserts that the underlying good governance principles are accountability, transparency, objectivity and focus on the sustainable success of an entity over the long term. ABC would also agree with the comments that the chairman made in his preface but notes that whilst this latest iteration of the Code and its predecessors has done much to improve accountability, there has not been equivalent progress on transparency. All of Section C1 Corporate Reporting and, in particular, the new provision (C.1.2) will improve the current level of transparency but this section does not go far enough. Indeed, ABC would suggest that in point C.1.2 directors should be required to comply with the recommendations of the Accounting Standards Board’s report on narrative reporting (published in October 2009) which proposes a much greater step forward in transparency.

This is essential in our view, as ABC has found that without proper transparency, the outside observer will find it impossible to evaluate the effectiveness of a board. Without improvement investors will be unable to engage more effectively unless they demand access to sufficient information, which in turn, may be judged to be price-sensitive. As a result of this, the institutional investors will be constrained from looking after their clients properly.

Second and of equal significance, ABC has found that without the discipline of real transparency, Boards allow opacity to drift into the Board and become less than rigorous in the leadership of their companies.

Third, ABC has also found that the Code in its efforts to be principle-based rather than prescriptive nurtures a degree of opacity. This may well be attractive if the minimum standards are achieved, but ABC is of the view that the existing and former versions of the Code lack a clear definition of what is an effective board. This has led to a wide range of definitions and records of board effectiveness, some of which (under proper scrutiny) would prove hard to justify whether shareholders interests are being managed at all. But companies have, to date, been able to conceal this if necessary (as there has been little requirement for comprehensive transparency either from the Code, legally or by investors).

If the FRC could further improve the level of transparency in reporting and define clearly what an effective board is, then, ABC believes there would be, not just an improvement in Board effectiveness across all Boards, but that all investors (both institutional and private) would be armed with the means of understanding the effectiveness of the Boards and thus be able to fully engage with them. Indeed without this, initiatives such as the Stewardship Code are likely to have limited impact.

ABC has separately provided a detailed breakdown of comments on each main and supporting principle and each provision for each Section and the Appendix of the new Code. However, ABC would like to highlight the following comments:

(i) If the chairman is responsible for the effectiveness of the Board, then there is a potential conflict of interest if an external resource or internal resource were to be responsible for the evaluation. ABC would suggest that the Senior Independent Director is responsible for, at least, the periodic externally managed board review or even the annual board review.

(ii) ABC is concerned if any director or chairman is subject to an annual vote. First in the absence of a definition of board effectiveness it would be hard for directors or the chairman to know how they would be assessed and thus how to perform. Second, and in particular, as the Code suggests the Board is responsible for the long term success of a company and not just the short term - how could an annual election take appropriate account of the long term record?

(iii) On Risk, ABC believes the risk management systems should be subject to an annual review along with the internal controls and both should be subject to an externally managed review so as to ensure these systems match best practice within their industry or sector. ABC also believes risk appetites need to be disclosed so that shareholders understand that the extent of their capital is at risk. But whilst this term is commonly used, ABC is unaware of a widely accepted definition of this appetite.

(iv) On remuneration, it remains unclear to ABC exactly how Remuneration Committees can demonstrate that they have set levels of remuneration for their executive directors that are ‘no more than necessary’ as suggested by the Code.






The Combined Code quotes Sir Derek Higgs The use of an external third party to conduct the evaluation will bring objectivity to the process.		Armstrong Bonham Carter's response to the Financial Reporting Council's consultation on the Revised UK Corporate Governance Code March 2010 Article by Tom Bonham Carter 04 Mar 2010 Armstrong Bonham Carter (ABC) is delighted to provide some views on the proposed revisions to the Combined Code of Corporate Governance which is to be renamed the UK Corporate Governance Code (Code) as requested by the Financial Reporting Council (FRC). ABC agrees with the FRC in its introduction when it asserts that the underlying good governance principles are accountability, transparency, objectivity and focus on the sustainable success of an entity over the long term. ABC would also agree with the comments that the chairman made in his preface but notes that whilst this latest iteration of the Code and its predecessors has done much to improve accountability, there has not been equivalent progress on transparency. All of Section C1 Corporate Reporting and, in particular, the new provision (C.1.2) will improve the current level of transparency but this section does not go far enough. Indeed, ABC would suggest that in point C.1.2 directors should be required to comply with the recommendations of the Accounting Standards Board’s report on narrative reporting (published in October 2009) which proposes a much greater step forward in transparency. This is essential in our view, as ABC has found that without proper transparency, the outside observer will find it impossible to evaluate the effectiveness of a board. Without improvement investors will be unable to engage more effectively unless they demand access to sufficient information, which in turn, may be judged to be price-sensitive. As a result of this, the institutional investors will be constrained from looking after their clients properly. Second and of equal significance, ABC has found that without the discipline of real transparency, Boards allow opacity to drift into the Board and become less than rigorous in the leadership of their companies. Third, ABC has also found that the Code in its efforts to be principle-based rather than prescriptive nurtures a degree of opacity. This may well be attractive if the minimum standards are achieved, but ABC is of the view that the existing and former versions of the Code lack a clear definition of what is an effective board. This has led to a wide range of definitions and records of board effectiveness, some of which (under proper scrutiny) would prove hard to justify whether shareholders interests are being managed at all. But companies have, to date, been able to conceal this if necessary (as there has been little requirement for comprehensive transparency either from the Code, legally or by investors). If the FRC could further improve the level of transparency in reporting and define clearly what an effective board is, then, ABC believes there would be, not just an improvement in Board effectiveness across all Boards, but that all investors (both institutional and private) would be armed with the means of understanding the effectiveness of the Boards and thus be able to fully engage with them. Indeed without this, initiatives such as the Stewardship Code are likely to have limited impact. ABC has separately provided a detailed breakdown of comments on each main and supporting principle and each provision for each Section and the Appendix of the new Code. However, ABC would like to highlight the following comments: (i) If the chairman is responsible for the effectiveness of the Board, then there is a potential conflict of interest if an external resource or internal resource were to be responsible for the evaluation. ABC would suggest that the Senior Independent Director is responsible for, at least, the periodic externally managed board review or even the annual board review. (ii) ABC is concerned if any director or chairman is subject to an annual vote. First in the absence of a definition of board effectiveness it would be hard for directors or the chairman to know how they would be assessed and thus how to perform. Second, and in particular, as the Code suggests the Board is responsible for the long term success of a company and not just the short term - how could an annual election take appropriate account of the long term record? (iii) On Risk, ABC believes the risk management systems should be subject to an annual review along with the internal controls and both should be subject to an externally managed review so as to ensure these systems match best practice within their industry or sector. ABC also believes risk appetites need to be disclosed so that shareholders understand that the extent of their capital is at risk. But whilst this term is commonly used, ABC is unaware of a widely accepted definition of this appetite. (iv) On remuneration, it remains unclear to ABC exactly how Remuneration Committees can demonstrate that they have set levels of remuneration for their executive directors that are ‘no more than necessary’ as suggested by the Code.
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