Summary
7 SUMMARY OF CONCLUSIONS AND
RECOMMENDATIONS
Principles of Corporate Governance
1 We recommend that companies should include in their
annual reports a narrative account of how they apply the
broad principles set out in Chapter 2 (2.1).
Application of the Principles
2 Companies should be ready to explain their governance
policies, including any circumstances justifying depar-
ture from best practice; and those concerned with the
evaluation of governance should apply the principles in
Chapter 2 flexibly, with common sense, and with due
regard to companies individual circumstances (1.11).
‘Box ticking’ is ncither fair to companies nor likely to be
efficient in preventing abuse (1.12-l. 14).
The Future
3 We intend to produce a set of principles and code of good
corporate governance practice, which will embrace
Cadbury and Greenbury and our own work. We shall
pass this to the London Stock Exchange. We suggest that
the London Stock Exchange should consult on this docu-
ment, together with any proposed changes in the Listing
Rules (1.23).
4 We envisage that the London Stock Exchange will in
future make minor changes to the principles and code;
and we suggest that the Financia1 Reporting Council
should keep under review the possible need for further
studirs of corporate governance. Rut we see no need for a
permanent Committee on Corporate G o v e r n a n c e
(1.25 -1.26).
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Corporate Governance
Directors
5 Executive and non-executive directors should continue to
hav e the same duties under the law (3.3).
6 Managememt thas a n obligation to provid e the hoard with
ea appropriate and timely information and the chairman
has a particular responsibility to ensure that al1 directors
are properly briefed. This is essential lif the board is to hc
effectivc (3.4).
7 An individual should receive eappropriate training o n the
first ocassion that heeo r sh e is appointed to the b o a r d of
a listed company and
, subsequently yas necessary (3.5).
8 Boards should appoint as executive edirectors only those
executives whom they judge able to take a broad view of
the company’s overa11 interests (3.6).
9 The majority of non-executivr director-s should he inde-
pendent ,and hoards should disclose in the annual report
which of the non-executive director-s are considered to
d he
independent (3.9). This applies for companies of al1 sizes
(3.10).
10 There is overwhelming gsupport in the UK for the unitary
hoard, and virtually none for the two tier board (3.12).
ll We suggest that boards
b
s should consider rintroducing p r o -
cedures sf o r assessing gt h e i r ow n collective e
performancc
and that of individual director-s (3.13).
12 We consider rthat, to b e cffective n
, on-executive director-s
need to make up at lrast one third of thr membcrship po f
thr board (3.14).
13
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Summary
14 Separation of the roles of chairman and chief executive
office r is to be preferred, other things being equal, and
companics should justify a decision to combine thr roles
(3.17).
15 Whcthrr or not the roles of chairman and chief executive
o f f i c e r arc combined, a senior non-executive dirretor
should be identified in the annual report, to whom con-
cerns can be convcye d (3.18).
16 Companies should set up a nomination committee to make
recommrndations to the board on al1 new board appoint-
ments (3.19).
17 Al1 directors should submit themselves for re-election at
least every three years, and companies should make any
necessary changes in their Articles of Association as soon
as possible (3.21).
18 Names of directors submitted for re-election should be
accompanied by biographical details (3.21).
19 Therr should be no fixed rules for the length of service or
age of non-executive directors: but there is a risk of their
becoming less cfficient and objective with length of ser-
vice and advancing age, and boards should be vigilant
against this (3.22).
20 It may bc appropriate and helpful for a d i r e c t o r w h o
resigns beforc the expiry of his term to give an explana-
tiou (3.23).
Directors’ Remuneration
21 We urge caution in tho use of inter-company comparisons
and remuneration surveys in setting levels o f d i r e c t o r s ’
remuneration (4.4).
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Corporate Governance
22 We do not rccommend df u r t h e r r e f i n e m e n t in t h e
Greenbury code provisions srelating to performance relat-
ed pay. Instead w e urge remuneration committees to use
their judgement in devising schemes appropriate for the
specific circumstances of the company. Total rewards
from such schemes should not be excessive e(4.7).
23 We see no objection to paying a non-executive director’s
remuneration in the company’s shares, but do not recom-
mend this as universal practice e(4.8).
24 We consider rthat boards should set as their objective ethe
reduction of directors’ contract tperiods to one year or
less , but recognise that this cannot tbe achieved inmedi-
ately (4.9).
25 We see some advantage in dealing with a director’s early
departure by agreeinng in advance eo n the payments to
which he o r she would be entitled in such circumstances
(4.10).
26 Boards should establish a remuneration committee, made
up of independent non-executive directors, to develop
policy o n remuneration and devise remuneration pack-
ages for individual executive directors (4.11).
27 Decisions o n the remuneration packages of executive
directors should be delegated to the remuneration com-
mittee; the broad framework and cost tof executive eremu-
neration should be a matter for the board o n the advice
of the remuneration committee e(4.12). The board should
itself devise remuneration packages for non-executive
directors (4.13).
28 Thr requircment ot n directors to include in the annual
reportta general statement to n remuneration policy should
be retained. .We hope that these statements will be made
more informative e(4.15).
Summary
29 Disclosure of individual remuneration packages should
he retained; hut we consider that this has become too
complicated. W e welcome rccent simplification of the
Companies Act rules; and we hope that the authorities
concerned will explore the scope for further simplifica-
tion (4.16).
30 We consider that the requirement to disclose details of
individual remuneration should continue to apply to
overseas based directors of UK companies (4.17).
31 We support the requirement to disclose the pension impli-
cations of pay increases which has been included in the
Stock Exchange Listing Rules. We suggest that companies
should make clear that transfer values cannot meaning-
fully be aggregated with annual remuneration (4.19).
32 We agree that shareholder approval should be sought for
new long-term incentive plans (4.20); hut we do not
favour obliging companies to seek shareholder approval
for the remuneration report (4.21).
Shareholders and the AGM
33 W e recommend p e n s i o n f u n d trustees to encourage
fund managers to take a long view in managing their
investments (5.6).
34 We believe that institutional investors have a responsibil-
ity to their clients to make considered use of their votes;
and we strongly recommend institutional investors of al1
kinds, wherever practicable, to vote the shares under
their control. But we do not recommend that voting
should be compulsory (5.7).
35 We suggest that the ABI and the NAPF should examine
the problem caused by the existence of diffcrent and
incompatible shareholder voting guidelines (5.8).
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Corporate Governance
36 We recommend that institutions should make available to
clients, on request, information on the proportion of res-
olutions on which votes were cast and non-discretionary
proxies lodged (5.9).
37 We encouragc companies and institutional shareholders
to adopt as widely as possible the recommendations in the
report Developing a Winning Partnership ( 5 . 1 1 ) .
38 Companies whose AGMs are well attended should consid-
er providing a business presentation at tbe AGM, with a
question and answer session (5.14(a)).
39 We recommend that companies should count al1 proxy
votes and announce the proxy count on each r e s o l u t i o n
after it has been dealt with on a show of hands (5.14(b)).
40 We hope that the DTI will soon be able to implement their
proposals on the law relating to shareholder resolutions,
proxies and corporate representatives (5.16).
41 We consider that shareholders should be able to vote sep-
arately on cach substantially separate issue; and that the
practice of ‘bundling’ unrelated proposals in a single res-
olution should cease (5.17).
42 T h e chairman should, if appropriate, provide the ques-
t i o n e r w i t h a w r i t t e n a n s w e r to a significant q u r s t i o n
which cannot be answered on the spot (5.18).
43 The decision on who should answer questions at the AGM
is one for thr chairman; but we consider it good practice
for the chairmen of thc audit, remuneration and nomina-
tion committees to be available (5.19).
44 Companies should propose a resolution at the AGM rclat-
ing to the report and accounts (5.20).
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Summary
45 Notice of the AGM and related papers should he sent to
shareholders at least 20 working days before the meeting
(5.21).
Companies may wish to prepare a resumé of discussion at
the AGM and make this available to shareholders on
request (5.22).
4 7 We commend the practice of some companies in establish-
ing in-house n o m i n e e s , in order to restore rights to pri-
vate investors who use nominees; and we note that the
DTI and the Treasury are considering changes in the law
for the same purpose (5.25).
Accountability and Audit
48 Each company should establish an audit committee of at
least three non-executive directors, at least two of them
independent (6.3). We do not favour a general relaxation
for smaller companies, but recommend shareholders to
show flexibility in considering cases of difficulty on their
merits (6.4).
49 We do not recommend any additional requirements on
auditors to report on governance issues, nor the removal
of any existing prescribed requirements (6.7).
50 We suggest that the bodies c o n c e r n e d s h o u l d consider
reducing from 10% the limit on the proportion of total
income which an a u d i t firm m a y e a r n f r o m one a u d i t
client (6.8).
51 We suggest that the audit committee should keep under
review the overa11 financia1 relationship between the com-
pany and its auditors, to cnsure a b a l a n c e between t h e
m a i n t e n a n c e of objectivity and value for money (6.9).
52 We recommend that the word ‘effectiveness’ s h o u l d b e
dropped f r o m p o i n t 4 . 5 in t h e Cadbury code, which
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Corporate Governance
would then read ‘The directors should report on the com-
pany’s system of interna1 control’. We also recommend
that the auditors should report on interna1 control pri-
vately to the directors, which allows for an effective dia-
logue to take place and for best practice to evolve (6.12).
53 Directors should maintain and review controls relating to
al1 relevant control objectives, and not merely financia1
controls (6.13).
54 Companies which do not already have a separate interna1
audit function should from time to time review the need
for one (6.14).
55 The requirement on directors to include a ‘going concern’
statement in the annual report should be retained (6.18).
56 Auditors are inhibited from going beyond their present
functions by concerns about the law on liability. Account
should be taken of these concerns by those responsible
for professional standards and in taking decisions on
changes in the law (6.19).
