THE COMBINED CODE ON CORPORATE GOVERNANCE
The Combined Code on Corporate Governance
Preamble Section 1 A B C D COMPANIES Directors Remuneration Accountability and Audit Relations with Shareholders 1-3 5-20 5-12 13-15 16-18 19-20
2 INSTITUTIONAL SHAREHOLDERS E Institutional Shareholders
Schedule A Provisions on the design of performance related remuneration Schedule B Guidance on liability of non-executive directors: care, skill and diligence Schedule C Disclosure of corporate governance arrangements
23 24 25-32
CODE ON CORPORATE GOVERNANCE
1. Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; if it is ignored, the consequence may well be vulnerability or poor performance. Good governance should facilitate efﬁcient, effective and entrepreneurial management that can deliver shareholder value over the longer term. The Combined Code on Corporate Governance (‘the Code’) is published by the FRC to support these outcomes and promote conﬁdence in corporate reporting and governance. The Code is not a rigid set of rules. Rather, it is a guide to the components of good board practice distilled from consultation and widespread experience over many years. While it is expected that companies will comply wholly or substantially with its provisions, it is recognised that noncompliance may be justiﬁed in particular circumstances if good governance 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 voting intentions may be inﬂuenced as a result. This ‘comply or explain’ approach has been in operation since the Code’s beginnings in 1992 and the ﬂexibility it offers is valued by company boards and by investors in pursuing better corporate governance. 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. 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.
The Combined Code
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. 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...