The European Commission published its Recommendation on the role of non-executive directors in February 2005. Member States are invited, but not required, to promote the application of the Recommendation's principles by 30 June 2006. The principles are applicable to listed companies, although Member States are allowed to extend the ambit to unlisted companies. The Recommendation adopts the comply or explain approach utilised by the UK Combined Code. The UK will most likely preserve this approach, which the Commission notes is often more efficient than the binding legislation Member States can opt for as an alternative.

The Recommendation is unlikely to have any effect on anyone currently holding a non-executive director position in the UK. The Combined Code already encompasses the Recommendation's provisions, and the UK government is not expected to introduce any further regulation as regards compliance.

It is worth noting that the Recommendation's scope is broader than the UK regulation in the sense that it will also apply to non-EU Companies listed on regulated markets within the EU. In brief, the Recommendation outlines the following:

  • The scope, operation and transparency of remuneration, nomination and audit committees and their relationship with the supervisory board.
  • Supervisory boards should include a balance of executive and non-executive directors precluding a minority from dominating decision-making.
  • The roles of the Chairman and the CEO could, it is suggested, be separated in a unitary board.
  • There should be a sufficient number of non-executive directors to ensure their efficacy where there is a high risk of conflict of interest.
  • The board should annually review its capability to meet the expectations of shareholders, with regard to each director individually and the board as a whole.
  • The role of non-executive directors in detail. They are deemed independent where they are free from material conflict of interest.

George Boyle is a partner specialising in corporate finance with commercial law firm Shepherd and Wedderburn. 0141 566 8515

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