On 3 March 2011, the Financial Reporting Council published its new Guidance on Board Effectiveness. The guidance is designed to assist listed companies in applying the principles of the UK Corporate Governance Code. The guidance relates principally to sections A and B of the UK Corporate Governance Code on the leadership and effectiveness of boards. The guidance replaces the "Higgs Guidance" which was last issued in 2006.
Key areas covered by the guidance include:
- The role of the board and directors – Part one provides specific guidance on the roles of the chairman, senior independent director, executive directors and non-executive directors.
- Board support and the role of the company secretary – Part two of the guidance covers board support and the role of the company secretary. The guidance states that the company secretary should report to the chairman on all corporate governance matters and should periodically review with the chairman whether the governance processes are fit for purpose or could be strengthened.
- Decision making – Part three of the guidance emphasises the importance of well-informed and high-quality decision making. The guidance sets outs factors which can facilitate good decision making and lists a number of factors that can limit effective decision making.
- Board composition and succession planning – Part four of the guidance sets out factors which the nomination committee should consider when making appointments to the board. In line with the provisions of the UK Corporate Governance Code, the guidance emphasises the need to have a board with the appropriate range and balance of skills, experience, knowledge and independence. The guidance highlights the importance of diversity of psychological type, background and gender.
- Evaluating the performance of the board and directors – Part five of the guidance deals with the board evaluation process and notes the UK Corporate Governance Code recommendation that FTSE 350 companies have externally-facilitated board evaluations at least every three years.
- Audit, risk and remuneration – Part six of the guidance emphasises that although boards may delegate to committees to assist in their consideration of audit, risk and remuneration, boards retain responsibility for, and make the final decisions on, all of these areas.
- Relations with shareholders – Part seven of the guidance emphasies the importance of using the annual report as a means of communicating with shareholders and for providing well thought out disclosures on the company's corporate governance arrangements and the board evaluation exercise.
View the FRC Guidance on Board Effectiveness (18 page pdf)