2007 Review of the Combined Code

The FRC undertakes regular reviews of the impact and implementation of the Combined Code to ensure that it continues to work effectively.

The 2007 review began with a public consultation exercise that was held between April and July. Views were invited on any aspect of implementation of the Code, but in particular on the following questions:

• Does the Code support better board performance over time?
• Is the ‘comply or explain’ approach working effectively?
• What impact has the Code had on smaller companies?
• Do disclosures on the Combined Code in annual reports provide useful information to shareholders at proportionate cost to companies?

 Review of the impact of the Combined Code (April 2007) (77kb)

Over 100 responses were received to the consultation exercise, the majority being from listed companies, institutional investors and their representative bodies. The main points raised by respondents are summarised here:

 Summary of responses to Consultation (137kb)


Responses to the 2007 Review of the Combined Code

Main findings of the review

The main findings of the review were published in December 2007 are set out here:

 Report on the main findings of the Review (123kb)

The review found that:

• The Combined Code continues to have a broadly beneficial impact, and is seen as having contributed to higher overall standards of governance among UK listed companies and to more professional boards.
• While there are many positive indicators to suggest that the ‘comply or explain’ approach is working fairly well, there is also a good deal of frustration with its day-to-day operation. In particular, investors are concerned by what they consider to be the poor quality explanations provided by some companies, while companies consider some investors and voting advisory services to be guilty of ‘box-ticking’ and failing to give sufficient weight to explanations.
• While it appears that there is currently a critical mass of institutional investors who devote the necessary time and resource to constructive engagement needed to make ‘comply or explain’ work, it will be necessary to keep the health of the engagement process under review. Action may also be needed to address structural barriers to constructive engagement.
• There is little support for widespread derogations from the full Code to apply to smaller companies.
• There has been a gradual but discernible improvement in the overall quality of disclosure by companies, although the general perception among investors and other observers is that there remains scope for considerable improvement.

In light of these views it was considered that the FRC should focus its efforts on improving the practical application of the Code as this would be of greater benefit than a major overhaul of the content of the Code, which enjoyed broad support.

Changes to the Combined Code

In June 2008 the FRC published a new edition of the Combined Code which introduced two changes. These changes:

• remove the restriction on an individual chairing more than one FTSE 100 company; and
• for listed companies outside the FTSE 350, allow the company chairman to sit on the audit committee where he or she was considered independent on appointment.

Full details of the changes to the Code can be found here:

 June 2008 Changes to the Combined Code (78kb)

 Regulatory Impact Assessment (65kb)

The new edition of the Code can be found here.

The revised Code took effect at the same time as new FSA Rules implementing EU requirements relating to corporate governance statements and audit committees. The revised Code and new Rules will apply to accounting periods beginning on or after 29 June 2008. In practice this means most companies will begin to apply them in 2009, and will report against them for the first time in 2010.

These amendments were consulted on between December 2007 and March 2008. The consultation document, a summary of the main points made by respondents, and copies of individual reponses are available here:

 Consultation document (97kb)

 Summary of responses to December 2007 consultation (109kb)

Responses to 2007 consultation on amendments to the Combined Code