UK: The Higgs Report

Last Updated: 24 January 2003

The Higgs Report on Non-Executive Directors and the Smith Report on Audit Committees – substantial changes in corporate governance best practice

20 January 2003 saw the publication of both Derek Higgs’ "Review of the role and effectiveness of non-executive directors" and the Financial Reporting Council’s new guidance for audit committees, produced by a group chaired by Sir Robert Smith.

They constitute a significant overhaul of best practice in corporate governance. The new requirements, particularly those on the composition of boards and audit committees, will have a major impact on all UK listed companies.

The Higgs Report

The Higgs Report can be obtained from www.dti.gov.uk/cld/non_exec_review. The Higgs Report rejects the imposition of change by law or regulation and instead proposes a revised Combined Code and continuing with the "comply or explain" principle. The suggested new Code principles and provisions are discussed in the main text of the report (references in brackets below are to the relevant sections of the Higgs Report).

The FRC is inviting "fatal flaw" and drafting comments on the draft Code by 14 April, and will issue the final version to come into effect on 1 July. It is not yet clear whether there might be a transitional period for the "comply or explain" requirement for the new Code, or whether it will be in place in full for the 2004 annual report season.

The report also makes a number of best practice recommendations, which will not form part of the Code. These are collected together in Annex B.

Board balance

The biggest change is a new Combined Code provision that at least half of the members of the board, excluding the chairman, should be independent non-executive directors (9.5). This will involve a huge shake-up. Recent research by PIRC suggests that independent directors are in a majority on less than 20% of the boards it analysed. The report emphasises that the practical implications of this mean that it will take some time to achieve. However, listed companies will still have to explain whether they meet the board composition requirements and, if not, what steps they are taking to do so.

The other side of the coin is that it is not desirable to have a very small number of executive directors – that leads to a greater risk of distortion or withholding of information, or lack of balance in the management contribution to boardroom debate. The amended Code will therefore provide that there should be strong executive representation on the board (8.6).

Then the final part of the equation is that there is also to be a new Code provision to the effect that board sizes should not be so large as to become unwieldy (4.10) – so simply appointing a whole raft of new non-executives won’t work.

All of this means that there will be no sudden change and that companies will have to just gradually adjust the board balance over a number of years.

Role of the board

There was some speculation last year that the report might call for "two-tier" boards. In fact, it endorses the unitary board.

Higgs has, however, added a new Code provision that the non-executive directors should meet on their own at least once a year, and there should be a statement in the annual report on whether they have done so (8.8).

The Combined Code will contain an expanded statement on the role of the board (Chapter 4). This emphasises both its entrepreneurial role and its ethical responsibilities – to set the company’s values and standards and ensure that its bligations to shareholders and others are understood and met.

In addition, individual boards should publish in their annual report a description of how the board operates, including a statement of which decisions are taken by the board and which are delegated, and stating the number of meetings of the board and each board committee and attendance by individual directors (4.8).

Role of the chairman

The report suggests substantial changes in best practice in relation to the role and independence of the chairman. It takes a more robust stance than the existing Code on separating the roles of chairman and chief executive – a clear statement that the roles should be separated (5.3).

Augmenting this is a new Code provision that the division of responsibilities between the chairman and chief executive should be set out in writing and agreed by the board (5.5). The guidance on the chairman’s role and responsibilities (Annex D) will help in doing this.

The new Code will also say that a chief executive should not become chairman of the same company (5.7). This has previously been regarded as a tricky issue, but not one where there was a clear-cut view, and there are some recent high-profile examples of a chief executive moving on to become chairman. Finally, there is a new Code provision on the application of the independence criteria to the chairman. At the time of appointment the chairman should meet the test of independence (see below), but it is not appropriate or necessary for him to do so once he has been installed in his role (5.8).

The role of the non-executive director

A new provision in the Combined Code will give some guidance, for the first time, on the role of the non-executive director. This is fourfold: to challenge and contribute to strategy; to scrutinise the performance of management; to assess the accuracy of financial information and the robustness of risk management systems; and to determine levels of executive remuneration and play a key part in executive appointments, removals and succession planning (Chapter 6).

The report focuses on the behaviours and personal attributes that make a non-executive director effective. Critics of UK plc’s corporate governance have suggested that whilst corporate governance initiatives may prescribe structures and systems, truly effective protection lies in the calibre of the individuals involved. The report describes the relevant qualities: integrity and high ethical standards; sound judgement; the ability and willingness to challenge and probe; and strong interpersonal skills (Chapter 6, and the guidance for non-executive directors at Annex C).

Senior independent director

Higgs endorses the appointment of a senior independent director, which was one of the more controversial innovations in the original Combined Code.

What is new is the proposed Code provision which will say that the main role of the appointee will be to act as a separate channel for shareholders (7.5). The senior independent director should be available to shareholders who have concerns that have not been resolved through contact with the chairman or chief executive, or which are inappropriate to raise with them. Initial reactions have been that this could lead to boardroom splits; only time will tell whether that will be the case.

Another new Code provision will make it the senior independent director’s responsibility to attend "sufficient of the regular meetings of management with a range of major shareholders to develop a balanced understanding of the themes, issues and concerns of shareholders" (15.15).

Independence

Whilst focusing on the technical concept of "independence", the report does point out that all non-executive directors and indeed all executive directors need to be independent in the sense of being independent of mind and willing and able to question, challenge and speak up.

For the first time, there will be some guidance in the Combined Code itself on the meaning of "independence" in the stricter sense, as it is to be applied to independent non-executive directors (see inset box for the new definition). There are currently over a dozen such definitions in the UK, despite the attempts of the ABI and NAPF who published a joint statement of guidance in 1999 which they hoped would be definitive. It will be interesting to see whether the various shareholder bodies do indeed drop or amend their own criteria for assessing independence.

Independence Explained

A non-executive director is considered independent when the board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the director’s judgement. Such relationships or circumstances would include where the director:

• is a former employee of the company or group until five years after employment (or any other material connection) has ended;

• has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;

• has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;

• has close family ties with any of the company’s advisers, directors or senior employees;

• holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;

• represents a significant shareholder; or • has served on the board for more than ten years.

The board should identify in its annual report the non-executive directors it determines to be independent. The board should state its reasons if a director is considered to be independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination.

(Suggested Code provision A.3.4).

Recruitment and appointment

A key aspect is the report’s focus on the importance of the nomination committee, which has tended not to attract as much attention as the audit and remuneration committees.

Higgs found that high levels of informality still surround the process of appointing non-executive directors. Almost half of the non-executive directors surveyed were recruited to their role through personal contacts or friendships, despite the existing requirement in the Combined Code that non-executive directors should be appointed pursuant to a formal and transparent procedure. This will support the arguments of those who oppose the voluntary "comply or explain" approach as ineffective.

New Code provisions for strengthening the role of the nomination committee (10.9) include:

• An express recommendation that all listed companies should have one (hitherto "small" boards have been excused).

• A requirement that there should be a majority of independent non-executive directors (previously they were not required to be independent) and that it should be chaired by an independent non-executive director (previously, the chairman of the board or a non-executive director).

• The committee’s terms of reference should be made public.

• Before making a particular appointment, the committee should analyse the skills, knowledge and experience of the existing directors and in the light of this, prepare a description of the role and capabilities required for the new appointment.

• There should be a statement on the committee’s activities in the annual report; if external advice or open advertising has not been used, an explanation should be given; the number of committee meetings and individual attendances over the period should be stated.

• New non-executives should receive a letter of appointment setting out what is expected in terms of time commitments, committee membership and involvement outside board meetings (a specimen letter is provided in Annex H).

• When a non-executive appointment is put to a shareholder vote, the board should explain why they believe the individual should be appointed and how they meet the requirements of the role as described by Higgs.

A non-Code recommendation is that potential new non-executive directors should conduct due diligence on the board and the company to satisfy themselves that they have the right knowledge, skills and experience, and adequate time, to make a contribution to the board. Annex G sets out guidance for directors on pre-appointment due diligence. The revised Code will also contain a provision setting out for the first time the nomination committee’s role in orderly succession planning (10.13). And, although it is not in the Code, Higgs recommends that chairmen and chief executives should implement programmes to train and develop senior employees for future director roles (10.14).

Time commitments and limits on directorships held

The consultation responses indicated that there was widespread concern that non-executive directors devote insufficient time to their roles. The report suggests that greater clarity in the time commitments expected of directors would be useful. The new Code requirements will be:

• Non-executive directors must disclose to the chairman the nature and extent of their other appointments and confirm that they will have the time required for their role (12.13).

• The nomination committee should annually review the time required and use performance evaluation to assess whether the non-executive director is spending enough time on their duties (12.14).

• If a non-executive is offered appointments elsewhere, the chairman should be informed before any new appointment is accepted and the board should subsequently be informed (12.14).

• A full time executive director should not take on more than one non-executive directorship, nor become chairman, of a major company (that is, one which is or is likely to be a FTSE 100 company), and no individual should chair the board of more than one major company (12.19). Apart from this there is no limit per se on the number of non-executive directorships an individual can hold (12.16).

Nominating and appointing the chairman

There is some new non-Code guidance on nominating and appointing the chairman (10.34). The senior independent director, or deputy chairman if independent, should lead the process; the skills and expertise required should be identified and a job specification drawn up; and a shortlist of candidates should be considered, rather than possible individuals being considered in turn (10.35).

Widening the pool of non-executive directors

The report contains some practical suggestions for widening the pool of potential non-executive directors, such as considering individuals working in the charitable and public sectors who have developed strong commercial understanding (Chapter 10). These recommendations are not in the revised Code itself, but Sir Derek pulls no punches in his Introduction: "People are the key. Critical to improving the effectiveness of non-executive directors is raising the quality of appointees. The evidence collected for the Review shows that the current population of non-executive directors is narrowly drawn."

Higgs notes with approval that a new body made up of business leaders and others will be set up to help unearth candidates from the non-commercial sector who could have the right attributes. This group will report to the DTI in May.

Induction and Training for Directors

The revised Code will contain new provisions on induction for non-executive directors (11.1). It will be the chairman’s responsibility to ensure that new directors receive a comprehensive, formal and tailored induction on joining the board, which should include meetings with major investors.

The chairman will also be responsible for ensuring that the directors continually update their skills and knowledge (new Code provision A.5.7). The report has some thoughts on the conundrum of formal training for directors. Surveys of directors generally find that they would welcome more training, yet formal training programmes offered by business schools and other providers have a poor take-up. This is at least partly a reflection on the quality of the training that is on offer. The recommendation is that there should be a step change in training and development provision so that it is suited to the needs of boards (11.17).

Evaluation of directors

There are to be new Code provisions on performance evaluation. Boards will be required to evaluate their performance at least once a year (11.22).

Evaluation should cover the board, the committees and the individual directors. The chairman should act on the results of the evaluation, if necessary by appointing new members or seeking the resignations of existing directors.

The annual report should state whether performance evaluation is taking place and how it is conducted. This will be a significant change for many listed companies, as recent research by KPMG suggests that more than half of non-executive directors do not undergo formal performance evaluation, and of those who are assessed, less than a quarter are assessed annually.

The Company Secretary

The Code will now provide expressly that the company secretary has an important part to play in ensuring that adequate information, of the right kind, gets into the hands of the non-executives: "The chairman, supported by the company secretary, should assess what information is required. The executive directors should assemble it and be ready to validate its accuracy, reliability and compliance with laws and standards" (11.26).

The company secretary has overall responsibility to the board on corporate governance, and a new Code provision says he or she should be accountable to the board through the chairman on all governance matters (11.31). Impartiality and integrity are key. The report recommends (although it would not be a Code requirement) that larger companies, who are able to do so, should separate the roles of company secretary and finance director, and that smaller companies should build "Chinese walls" between the roles, so that information received in one capacity is not used for other purposes (11.33).

It is good practice (although not a new Code provision) for the company secretary or their designee to be secretary to all board committees (11.30).

Tenure of non-executive directors

The report says that an initial appointment for a non-executive director should not be less than three years (subject to satisfactory performance) and that it is reasonable to expect most non-executive directors to serve a second three year term (12.3). However, new Code provisions will make it clear that two three-year terms should be regarded as the norm and if, exceptionally, the board considers that there is value in a non-executive director serving longer, the reasons for it must be explained for shareholders (12.5). After nine years, non-executives should be subject to annual re-election (12.6).

Higgs considers that whilst a standard term of tenure for chairmen would not be appropriate, it is useful to appoint the chairman on three-year terms which may be renewed where appropriate.

Remuneration

The report supports greater transparency in the make-up of non-executive directors’ remuneration, and there is a non-Code recommendation that it should be clearly built up from an annual fee, meeting attendance fees (including committee meetings) and an additional fee for chairing committees or role as an independent director.

The report suggests that actual levels of remuneration are pretty much in line with expectations at larger companies, but that a modest increase at smaller listed companies might be merited. It warns against high levels of remuneration: "the risk of high levels of remuneration (or a large shareholding) prejudicing independence of thought is real and should be avoided."

Higgs articulates existing best practice in stipulating that non-executive directors should not hold options over the shares in their company (12.27), and this is a suggested new Code provision (applicable to non-executives generally, not just those who are independent). However, he believes there is merit in giving non-executive directors the opportunity to take part of their remuneration in shares (12.26).

There is a non-Code recommendation that companies should encourage executive directors and senior executives to take on non-executive posts elsewhere. Where an executive director is released to do so, the company should state in the remuneration policy report whether or not the director will retain his non-executive director fees and if so, the amount (the NAPF recommends that retention should not be permitted).

Resignation

There is an interesting discussion of the non-executive director’s "ultimate sanction" – resignation. Higgs’ view is that resignation should be regarded very much as a last resort, only when all other efforts to resolve the problems have failed, and points out that non-executive directors may be constrained by their fiduciary duties from resigning. A new Code provision says that in circumstances where non-executive directors have real concerns about the way the company is run or about a proposed course of action, they should raise them with the chairman and other directors. The Code will also say that they should ensure, as a matter of course, that their concerns are recorded in the minutes if they cannot be resolved (12.31).

The Code will say that if a non-executive director feels that resignation is the only option, a written statement should be provided to the chairman, for circulation to the board, setting out the circumstances (12.32). Non-executives should also explain their reasons for resigning when they leave in other circumstances.

Audit and remuneration committees

As well as having enough independent non-executive directors on the board, companies will have to comply with a new Code provision preventing any one individual from being on all three principal board committees at the same time (unless the board is small) (13.2).

Please see the section below on the Smith Report for a summary of the new recommendation on audit committees.

As now, the remuneration committee should consist exclusively of independent directors (13.8). It should have at least three members. There is a word of caution about the use of remuneration consultants: "compensation consultants were often perceived to be too close to executive management and too ready to encourage companies to position their remuneration policy in the "upper quartile" of their peer group comparators. Such a policy can have a one way ratchet effect which is undesirable for individual companies and inflationary and self-defeating in the market place."

The report echoes the recent ABI and NAPF statement on executive contracts and severance (published in December 2002), recommending that the remuneration and nomination committees work closely together to ensure that incentives are appropriately structured and that terms in case of severance are carefully considered (13.10). A new Code provision states that the remuneration committee should consider the advantages of providing explicitly in the initial contract for compensation commitments on severance except in the case of removal for misconduct, bearing in mind that such provisions should not have the effect of rewarding poor performance.

The Code will provide that the remuneration committee should have responsibility for setting remuneration for all executive directors and the chairman, and should set the level and structure of remuneration for senior executives (13.12), and that it should make its terms of reference publicly available (13.11). The Code will also provide that if executive directors or senior managers advise or support the committee, this role should be clearly separated from their role within the business.

A summary of the principal duties of the remuneration committee is set out in Annex E of the Report.

Liability of non-executive directors

The report welcomes the proposals of the Company Law Review for a codification of directors’ duties. In addition, it suggests some guidance aimed at non-executive directors in particular, which is to be annexed to the revised Combined Code. This would make it clear that whilst non-executive directors are under the same legal duties as executive directors, the knowledge and experience of a company’s affairs that could reasonably be expected of a non-executive director will generally be less than for an executive director. This may be relevant in assessing the duty of care, skill and diligence that the non-executive director may be expected to exercise.

The report notes that a director who is sued may apply to the Court for relief under Section 727 of the Companies Act 1985, and that it would be helpful for directors if such applications were dealt with promptly. Higgs recommends that the Lord Chancellor’s Department considers steps to promote active case management in cases applying to directors (14.11).

Insurance and indemnification

The report also considers the difficult issues surrounding insurance and indemnification of directors.

On indemnification, it recommends that the Government should go further than it is already proposing to do under the Company Law Review, and change the law so that a company can indemnify a director in advance against the reasonable cost of defending proceedings from the company itself, without trying to establish in advance the prospects of success of the case (14.16). It is difficult to see how this would work in practice, even if the Government does amend the law. If the disinterested members of the board have already decided that it is in the company’s best interests to bring proceedings against a director, how could they then decide that it is also in the best interests of the company to indemnify that director against his legal expenses? The only practical answer would seem to be insurance which covered the directors’ legal expenses, but the insurance industry has responded to the Higgs proposal by saying that such a change could result in a further massive increase in insurance premiums.

The report recommends a new Code provision to the effect that companies should arrange appropriate insurance cover for their directors. There is also a non-Code recommendation that companies supply details of their D&O cover to potential non-executive directors before they are appointed.

Relationships with shareholders

We have already noted that the senior independent director will have an enhanced role in meeting with major shareholders. Chapter 15 of the report also makes several other suggestions aimed at strengthening relationships. There is a new Code provision to the effect that non-executive directors should be able to attend meetings with major investors from time to time, and should expect to do so if requested by major investors (15.16).

As noted above, non-executive directors should meet with major shareholders as part of the induction process (15.17). It is also suggested that the company secretary could act as a conduit between major shareholders and non-executive directors (15.19).

The report supports the recent efforts of the Institutional Shareholders Committee to promote more active shareholder engagement (see our November 2002 briefing "Institutional shareholder activism: a sea change?" available via the contact details at the end of this bulletin) and endorses them in a new Code provision (15.24). The Code will also recommend that institutional shareholders should be expected to attend the AGM where practicable (15.25).

Smaller listed companies

These are defined as those outside the FTSE 350.

The Report says that the Combined Code should apply in full to smaller listed companies. The only exception is the recommendation that no one individual should sit on all three of the principal board committees. The report recognises however that it may take more time for smaller listed companies to comply and that some of the Code’s provisions may be less relevant or manageable for smaller companies. But the nature of the Code is such that companies can explain to shareholders where there is good reason for this, or for complying in a different way.

The Smith Report And Guidance On Audit Committees

A committee chaired by Sir Robert Smith, which also reported on 20 January, has reviewed and substantially expanded the Combined Code guidance in relation to audit committees. The report is available at http://www.frc.org.uk/publications/content/ ACReport.pdf.

The Smith Committee has liaised with Higgs to ensure that their approaches are in line. As with Higgs, Smith does not suggest any new legislation and instead proposes changes to the Combined Code. The new draft Combined Code in the Higgs Report incorporates the Smith proposals.

The changes to the Code will, as in the case of the Higgs Report proposals, come into force on 1 July 2003.

The introduction to the Guidance states that, whatever specific arrangements are put in place for an audit committee, these will not be effective unless there is mutual respect and open communication between the audit committee, the rest of the board and non-board executives. While it encourages the audit committee to take an independent stance from the executive function, it supports the existing UK unitary board structure, stating that its recommendations do not undermine that model.

The following recommendations are included in the new Combined Code, either directly or by cross-reference to the "black letter" requirements of the Smith Guidance, which is to be annexed to the Code. (Those parts of the Guidance that are "black letter", and therefore are stated to be essential, are marked * in the discussions below).

Membership and appointment

There should be at least three members of the audit committee, all independent non-executive directors*. The chairman of the company should not be a member*. Appointment (on recommendation of the nomination committee) should be for up to three years, with a maximum of three terms in total (i.e. nine years), as long as members continue to be independent.

Meetings

Audit committee meetings should be held at key stages in the company reporting cycle (usually at least three a year), but there is an emphasis on continuing communication outside formal meetings.

Only audit committee members should be entitled to attend meetings*; non-members will attend by invitation. A meeting with the external and internal auditors should take place at least once a year without management.

Resources and remuneration

The audit committee should be provided with sufficient resources to undertake its work*, for instance the services of the company secretary. This includes funds to take independent external advice, for example from lawyers or accountants.

The audit committee members, particularly the chairman, should be remunerated to recompense them for the additional work they are expected to undertake.

Skills, experience and training

At least one member of the audit committee should have ‘significant, recent and relevant financial experience’, preferably with a professional accounting qualification*. The report recognises that this will not always be necessary for smaller companies with straightforward operating and reporting issues.

A degree of financial literacy is also recommended for all members. To this end, training should be provided to audit committee members, both on joining and on an ongoing basis, for example on the company’s regulatory framework, financial reporting and company law issues, and the role of internal and external audit and risk management.

Terms of reference and relationship with the board

The board should provide written terms of reference for the audit committee*, tailored to the needs of the company (a basic example is given in Appendix I of the report). Both the audit committee and the board should review the effectiveness of the audit committee annually.

Where there is a disagreement between the board and the audit committee that cannot be resolved, the audit committee should have the right to report the issue to shareholders as part of the report on its activities in the directors’ report. This is controversial in light of the Smith Committee’s expressed support for the unitary board.

Financial reporting

One of the audit committee’s central roles is oversight of financial reporting, including review of significant issues and judgements made and clarity and completeness of disclosure*. There is a specific recommendation to report any dissatisfaction to the board on any financial reporting matters, including market announcements*.

Internal financial controls, risk management and internal audit

The audit committee should monitor the company’s internal financial control system* and assess the effectiveness of management’s approach to risk*. This includes ensuring that a process is in place for ‘whistleblowing’ by staff.

The audit committee should also monitor the internal audit function and, where there is none, consider annually whether one should be introduced and make a recommendation to the board*. A company’s reasons for not having an internal audit function should be disclosed in the annual report*.

The external audit process

The report emphasises that the audit committee is responsible for overseeing the company’s relationship with the external auditors*.

Appointment

The audit committee should make recommendations to the board on the appointment, reappointment and removal of the external auditors*. Where the board does not accept any audit committee recommendation, the audit committee section of the directors’ report should explain the difference in view and the reasons given by the board*.

The audit committee should assess the qualifications, expertise and resources, effectiveness and independence of the external auditors*, which will include obtaining a report on the audit firm’s own internal quality control procedures.

Terms and remuneration

The audit committee will also be charged with approving the terms of engagement and remuneration of the external auditors*.

Independence and the provision of non-audit services

There is extensive guidance on assessment of the independence of external auditors. The audit committee should have procedures to monitor independence*. They should institute policies agreed with the board, for example in relation to employing former auditors, as well as obtaining direct information from the auditors about their own controls over independence issues. The audit committee should recommend procedures to the board to ensure that the provision of non-audit services by external auditors does not compromise their independence*. These policies should be explained in the annual report*.

There is no outright ban on the provision of such services. Instead, the recommendation is to set up company policies by agreement with the board on the areas and types of work that the external auditors should be allowed to undertake.

The policies should have regard to the ethical guidance of the professional accountancy bodies, which is that the auditors should not be permitted to provide a service if as a result the auditors audit their own firm’s work, or make management decisions for the company, a mutuality of interest is created, or the external auditors are put in the role of advocates for the company*.

Annual audit cycle

The audit committee is expected to play an active role in the audit cycle, reviewing the audit plan, the audit findings and the effectiveness of the audit process*.

Communication with shareholders

The ability and right of the audit committee to communicate with shareholders is given weight in the report, which recommends the inclusion of a separate section within the directors’ report for the purpose*. This will describe the work of the audit committee and how it has fulfilled its responsibilities under the Code, as well as highlighting any disagreement with the board, as noted above. (An outline format for the report on the activities of the audit committee is given in Appendix II of the report.)

The chairman of the audit committee should also be present at the AGM to answer any questions*.

Gearing up for the new Combined Code: Steps that can be taken now

• Review the suggested new principles and provisions in the Combined Code – identify areas of current non-compliance (Annex A of Higgs Report).

• Review board composition – review number of independent non-executive directors against new criteria for independence (Chapter 9 of Higgs Report).

• Draft statement of division of responsibility between Chairman and Chief Executive (paragraph 5.5 and Annex D of Higgs Report)

• Consider senior non-executive director role – consider appointment if there is not one already and prepare statement of responsibility to reflect new role of liaison with shareholders (paragraph 15.15 of Higgs Report).

• Review time commitments of non-executive directors – collect information on other time commitments. Review and communicate time required to be devoted to role, taking into account committee memberships (paragraphs 12.13 and 12.14 of Higgs Report).

• Review composition of audit, remuneration and nomination committees – (paragraphs 10.9 and 13.11 of Higgs Report and paragraph 3.1 of Smith Report). Consider particular skills required of some independent non-executive directors, e.g. to serve on the audit committee (paragraph 3.16 of Smith Report).

• Review terms of reference of remuneration and nomination committees (Annexes E and F of Higgs Report).

• Review terms of reference of audit committee (Appendix 1 of Smith Report) and review work and meeting schedule for committee (paragraph 3.5 of Smith Report).

• Review standard non-executive director appointment letter (Chapter 12 and Annex H of Higgs Report).

• Appoint the Company Secretary, or deputy, as secretary to all board committees (paragraph 11.30 of Higgs Report).

• Develop induction programme for new non-executive directors (induction checklist in Annex I of Higgs Report).

• Develop formal evaluation process for directors (performance evaluation guidance in Annex J of Higgs Report).

• Set up professional development and training programmes for directors (Chapter 11 of Higgs Report).

• Review remuneration policy fornon-executive directors (Chapter 12 of Higgs Report).

• Draw up policies on the provision of non-audit services by auditors (paragraph 5.29 of Smith Report).

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.