RREV Says UK Company Boards Compliant, Not Complacent

Boards in the United Kingdom progressed from a position of complacency to compliance in 2005, according to RREV, the corporate governance body, jointly owned by the National Association of Pension Funds and ISS. RREV's post AGM season report, Board Effectiveness

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Boards in the United Kingdom progressed from a position of complacency to compliance in 2005, according to RREV, the corporate governance body, jointly owned by the National Association of Pension Funds and ISS.

RREV’s post-AGM season report, Board Effectiveness 2005, reveals that all FTSE 100 companies now comply with the Combined Code’s requirement that independent Non-Executive Directors (NEDs) make up at least half of the board (excluding the chairman). The report also highlights that FTSE 250 boards are not far off the mark.

Peter Thompson, CEO of RREV, commented, “Two years after the publication of the Higgs report on corporate governance, there is much to celebrate for the way it has helped lay foundations for stronger UK governance. It is positive to see greater board compliance and the revised Combined Code has contributed to the increasing time spent by non-executive directors in their roles.”

Executive remuneration remains a contentious issue for many UK boards and their investors. Companies are recognising the need for independent non-executive directors on the remuneration committee. But this year’s report highlights that more compliance is necessary. Over a quarter of FTSE 100 companies still do not comply with the demands of the Code, which requires that the remuneration committee consists of at least three independent NEDs, although, there is a significant improvement – 73% of FTSE 100 companies’ remuneration committees now comply as opposed to 57% in 2004 and 60% of FTSE 250 companies now comply as opposed to 52% in 2004.

On the issue of remuneration committees one other topic remains, namely the role of the chairman. In line with the Combined Code, RREV does not assess a remuneration committee as ‘compliant’ if the chairman sits on this committee. The report reveals that eight per cent of FTSE 100 chairmen and nearly one in five FTSE 250 chairmen sit on the remuneration committee. The NAPF and RREV have asked the Financial Reporting Council for clarification of the independence or non-independence of the chairman after appointment and, in either case, of the appropriateness of the chairman being a member of the remuneration committee. The Association of British Insurers has already stated that if chairmen could show they were independent, they should not be excluded from sitting on the remuneration committee.

Peter Thompson commented, “There remains ambiguity about the status of the chairman in this regard and given the importance of such committees in setting targets and performance hurdles, it is an issue that needs clarity.”

Although the role of the chairman is considered to be a part-time activity, the report highlights some chairmen have considerable commitments to numerous companies. This triggers concern as both the NAPF and RREV consider it good practice that a director should chair only one large or complex organisation at any given time.

Some companies are wrestling with this issue and finding new approaches to provide clear guidance on this issue to their board members and shareholders. For example, Barclays, for its own board governance purposes, contains directors’ role profiles and a charter of expectations. The expectations include an indication of the time commitment required to fulfil each board role.

Peter Thompson concluded, “We encourage each company concerned with this issue, to provide greater transparency in their disclosures regarding their Chairman’s commitments, including an insight into the contingency arrangements. Risk management is integral to successful management and companies should provide reassurance for their shareholders.”

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