UK: Governance in Brief - July 2005

Your summary of the latest corporate governance developments
Last Updated: 29 July 2005

FRC invites views on the impact of the 2003 Combined Code

The FRC has issued a call for evidence as part of its review of progress in implementing the 2003 version of the Combined Code on Corporate Governance, highlighting certain key areas on which it is seeking views from listed companies, directors, investors and other stakeholders. These include whether ‘comply or explain’ is working, any practical difficulties in implementing the Code and the overall quality of dialogue between boards and investors.

The FRC have confirmed that "[changes] to the Code will only be considered if there is a strong consensus that they are needed". They have also expressly acknowledged the significant changes in reporting and governance regulations with which listed companies in the UK have had to comply.

Date: 14 July 2005

Source: Financial Reporting Council

Further info:

Deadline: 14 October 2005

Findings of the Review of the Turnbull Guidance published

In Brief: The FRC have published the findings of its review of the Turnbull Guidance on Internal Control in a consultation document and have invited comments ahead of publishing revised guidance.

The Review’s conclusions and recommendations represent a huge vote of confidence in Turnbull and its principles-based approach. Calls to introduce elements of the Sarbanes-Oxley provisions have been resisted and there is no proposal to require an annual statement on the effectiveness of internal controls.

The key changes proposed would require the board to review its application of the Guidance on a continuing basis and to confirm that necessary action has been or is being taken to remedy any significant failings or weaknesses identified from their review of the internal control system.

The Review Group believes that implementation of the current draft amendments to the 4th and 7th Company Law Directives should be possible within the existing framework and risk-based approach of Turnbull.

Date: 16 June 2005

Source: Financial Reporting Council

Further info:

Deadline: 16 September 2005

New code on corporate governance for the mutuals sector

In Brief: The Association of Mutual Insurers (AMI) and the Association of Friendly Societies (AFS) have published an Annotated Combined Code on Corporate Governance for mutuals, based on the 2003 FRC Combined Code. The ‘comply or explain’ approach is adopted.

The Annotated Code will apply for mutual insurers for reporting years beginning on or after the start of the financial year 2005-2006. AMI and AFS will monitor and report on compliance with the Code and will be reviewing the impact of its implementation, whilst the Government will review compliance with the Code in 2008.

Date: 13 July 2005

Source: Association of Mutual Insurers

Further info:

Revised Listing Rules, Prospectus Rules and Disclosure Rules

In Brief: The FSA’s revised handbook including the new Listing, Prospectus and Disclosure Rules and the Listing Principles came into effect on 1 July 2005.

Six Listing Principles, which are enforceable as rules have been introduced. These are designed to ‘ensure the spirit as well as the letter of the rules is followed’ and they emphasise that companies will need to ensure that they have adequate systems and controls to comply with the Listing Rules and the Disclosure Rules.

Under the new Disclosure Rules, companies are required to announce ‘inside information’ to the market as soon as possible and the Model Code has been extended to ‘persons discharging managerial responsibilities’ and other employees with access to inside information.

The Prospectus Rules have been changed and separated out from the rest of the Listing Rules, and may now apply to AIM companies as well as those on the main market. When a prospectus is required and what information should be included within a prospectus must now be carefully considered under these rules. Any offering to the public falls within the rules although some limited exemptions exist.

Date: 1 July 2005

Further info:

Defra consults on "Environmental KPIs – Reporting Guidelines for Business"

In Brief: Defra has published new guidelines for consultation which aim to help businesses address their most significant environmental impacts and report on these in a way that meets the needs of their shareholders and other stakeholders. The indicators included cover areas such as greenhouse gas emissions, waste and water abstraction and in many cases, they make use of standard business data that may already be collected. KPIs have been mapped out for over 50 business sectors, identifying the most significant direct and indirect environmental impacts of each sector’s activities and processes.

These guidelines may assist Directors in reporting on significant environmental issues in the OFR.

Date: 27 June 2005

Source: Defra

Further info:

Deadline: Consultation ends on 19 September 2005

ASB Reporting Standard on the OFR issued

In Brief: The much anticipated new regime for the OFR has now been finalised with the publication of the ASB’s Reporting Standard 1.

The detailed legal rules are to be found in SI 2005/1011 issued on 21 March 2005. The ASB Reporting Standard requires directors to prepare an OFR addressed to members, setting out their analysis of the business, with a forward-looking orientation to assist members to assess the strategies adopted by the entity and the potential for those strategies to succeed.

The link below is to our latest Corporate Governance Update which includes further details of the legislation and the Reporting Standard together with a "pull out" OFR checklist.

Date: 10 May 2005

Source: Accounting Standards Board

Further info: (Services/Assurance & Advisory/Corporate Governance/Corporate Governance Update May 2005)

Audit committees may be enshrined in legislation (8th Directive broadened)

In Brief: The 8th Directive on Company Law may be broadened in scope and could potentially result in the replacement of the current ‘comply or explain’ approach to audit committees (as contained in the Combined Code) with mandatory law. The expanded directive is expected to be adopted later this year and based on the current draft wording of the directive, much will depend on how the UK government implements it.

The Directive may introduce requirements relating to audit committees monitoring the effectiveness of internal controls and risk management systems. The make-up and responsibilities of audit committees, including the need for at least one member ‘with competence in accounting and/or auditing’ and the responsibility for reviewing and monitoring independence of the statutory auditor, would potentially no longer be in the form of recommended practice but would be prescribed by legislation with the related enforcement implications.

The CBI and its European equivalent, UNICE, are lobbying hard against mandation for audit committees.

Source: European Commission

Further information: (8th Directive)

Market Abuse Directive implemented in the UK

In Brief: The EU Market Abuse Directive, adopted in 2003, is being implemented in the UK through the new FSA Disclosure Rules. The changes took effect on 1 July 2005 with no transitional period.

The most significant requirements include the need to disclose share dealings by senior management in addition to directors and the establishment and maintenance of insider lists. Companies and financial institutions will need to review their procedures, controls and systems of information management to ensure that they can comply with these requirements. Staff will need to receive sufficient training to familiarise them with the new requirements and procedures.

Source: FSA

Date: April 2005

Further information:

Company Law Reform Bill on its way

In Brief: The deadline for consultation responses to the DTI’s White Paper has ended and the Government is now putting the detail into a draft Bill.

The Bill will include the new statutory statement of directors’ duties which seeks to embed the concept of ‘Enlightened Shareholder Value’. This concept means that the directors’ aim should be the success of the company for the benefit of its members as a whole, having regard to employees, customers and suppliers and the community more widely.

There will also be provision for members (holding >5% voting rights or at least 100 of whom each hold >£100 paid up capital on average) to have the power to require the company to publish on its website a statement setting out matters relating to the audit of the company’s accounts or the circumstances of an auditor ceasing to hold office, ahead of the next accounts meeting.

The Bill will also give a statutory footing to shareholder derivative actions, the method by which shareholders are able to enforce the company’s rights where there has been a breach of duty by the directors.

Date: Consultation on White Paper ended in June 2005

Further info:

EC directive proposals on company reporting (4th and 7th Directives)

In Brief: The European Commission is still finalising the 4th and 7th Directives which, in part, deal with company reporting matters forming part of their Action Plan on Company Law and Corporate Governance.

Of particular relevance to those concerned with corporate governance are the following proposals:

  • collective responsibility of board members for the annual accounts and reports (applicable to all limited companies); and
  • introduction of a new corporate governance statement in the annual report referring, among other things, to the corporate governance code applied by the company together with an explanation of whether the company complies with that code and a description of the company’s internal control and risk management systems (applicable to all companies whose securities are traded on a regulated market).

Date: March 2005

Further info:

Time to take action

  • Consider timetable for the production of the mandatory OFR, whether or not to do a ‘dry run’ and consider whether to take legal advice especially in relation to forward-looking statements
  • Review internal procedures for prevention of market abuse and ensure relevant staff are familiar with latest requirements

On the horizon

  • Finalisation of revised 8th Directive from the EC
  • Finalisation of the 4th and 7th Directives
  • The FSA has commenced a programme to simplify its Handbook and remove unnecessary Rules and Guidance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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