There is however no reference to non-executive directors specifically in the Companies Act 2006. The input from non-executive directors has at best been questioned due to their ‘lack of Knowledge’ (FSA, 2009,Turner Review). This caused an adaption in the code in 2010 under principle B.2 in which “the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender”. As well as this criteria for selection there is call for further development by the OECD steering group in 2010 to make sure the directors ‘remain abreast of relevant new laws, regulations and changing commercial risks through in-house training and external courses.’
The fundamental issue in which corporate governance has come into question is that after researching the downfalls of many companies during the crisis, mainly banks, that there in fact very little evidence of breaking the codes of corporate governance and that in fact they had complied with these codes, as disclosed in their annual reports.
The review of this by the HM Treasury still decided that although , there were still mass corporate governance failures by the respective boards and especially in to risk management. Hannigan (2011)
This theory is further backed up by the De Larosière report, commissioned to deliver policy recommendations on strengthening EU financial market supervision and regulation in the context of the current crisis, has recognised corporate governance as ‘one of the main failures of the present crisis.’
This lack of judgment plays a big role in focusing on the suitability of non-executive directors. The main role of non-executive directors was seen as to question executive directors over their decisions and to account for their actions, however in truth this was something that rarely happened. It was more commonly seen as ‘like minded directors on a cosy board, with their fellow executive directors’ (Hannigan, 2011).
It is reported that due to the increase in remuneration received by non – executive directors due to larger work loads being introducedthere is less want to upset the executive directors, as a long term deal with such large money involved is too rewarding to turn down by irritating the executive directorsTherefore it is thought that the independence of these non executive directors according to Baginsky et al (2011) ‘It is important that the non executive directors should not be reliant on the company for a significant part of their income otherwise their independence may be jeopardized
The Financial Reporting Council (FRC) sought a review of the combined code in 2009, to examine the effectiveness of it, and to see if it played a part in the downturn of the econom. From this review there has been limited change to the codes despite the obvious need for concern as to the role it had during the crisis
The new adoption of principles through the UK Corporate Governance Code 2010 has in real terms only slightly altered the previous Combined Code the changes are in fact relatively small, with most already contained in the previous code. The code is enforced and regulated by the Financial Services Authority (FSA), and gives principles and a code of good practice for all companies that are listed on the London Stock Exchange.
Under s. 415 CA 2006 companies are obliged to publish a corporate governance statement in the directors report as part of their yearly accounts, which also means as this is made public then the perception of the company will be judged via this, and therefore this can be detrimental to how the company looks to the people outwith the company, possible investors for example.
This statement must follow the ‘comply or explain’ concept and therefore explain and show to what degree the company has applied the code, and if not, why they have not. A lack of compliance may result in poor public perception of the company, which will in the long term have negative
Another code of practice that is in place is the Stewardship Code. The Stewardship Code is a set of principles or guidelines announced in 2010 by the FRC directed at investors with voting rights in companies. Its main aim is to shareholders are active and engage in corporate governance in the interests of their beneficiaries.
This theory is backed up by the minister for corporate governance who states, “we can agree that it must help long term healthy growth if shareholders engage with the companies in which they invest.” (Davey, 2010)
As mentioned earlier in this current economic crisis it is very important that companies are able to convey confidence, the stewardship code aids this by encouraging the public disclosure of shareholders’ voting activities. Davey (2010) believes that, ‘Voting at company meetings is one of the most effective ways of providing long-term stewardship.’
The code is used as an aid to engage the shareholders by questioning the decisions made by the directors in the running of the company, and therefore in essence are ‘stewarding’ the company in view of their long term goals. This two way engagement is also governed by the CA 2006 under s.188 which forces directors to have the members consent to enter into contracts greater than two years, which also reduces the chance of directors receiving bribes to accept long lucrative contracts for personal benefits.
As can be seen, since the start of the crisis there has been slight differences to the ruling of corporate governance, looking forward, there is a general consensus that an independent board has to be set up
‘provide a forum for the review on an ongoing basis of governance issues.’ (Hannigan, 2012).
They would act under the FRC and be composed of experts of all corners of the governance field from the legal aspect, the accounting side , and to the representatives of institutional shareholders. Since the crisis there has been numerous reviews in relation to corporate governance and its effects on the economic downturn, from this there is currently speculation coming from the government that the architecture of regulations is subject to change, to create a “powerful” (Hannigan,2012) new regulator to govern corporate issues as well as the stewardship code, with the possible merger of the FRC and the UK Listing Authority according to the HM Treasury (2010).
Since the start of the crisis in 2008 it can be seen there has been changes to regulation in to this, however, it can also be seen that the changes made have been very minimalistic, the continuation of soft law, showing that they instead have tried to changes peoples thinking behind corporate governance, rather than forcing it through.
the changes are in fact just a rewording of previous codes but bringing other aspects into the main focus of the new Corporate Governance Code. There is a consensus that the way forward is through transparency and in setting long term goals as well as taking into account the concept of riskto ensure the prosperity of the company and allow it to reach its full potential.
Baginsky, S. Cohen, D. Michael, J. Duties of Executive and Non Executive Directors. (2011). P4.
Accessed via : http://www.baginskycohen.com/Documents/H7.pdf
Cadbury, A. The Financial Aspects of Corporate Governance, Gee, 2009
Companies Act 2006 (UK)
FSA, The Turner Review, A regulatory Response to the Global Banking Crisis. (2009). Para 2.8.
Hannigan, B. Board Failures in the Financial Crisis- Tinkering with codes and the Need for Wider Corporate Governance Reforms:Part 1(2011).p 2. accessed via 20/02/2012
Hannigan, B. Board Failures in the Financial Crisis- Tinkering with codes and the Need for Wider Corporate Governance Reforms:Part 2(2012).p3 accessed via on 20/02/2012
HM Treasury. A New Approach To Financial Regulation. (July, 2010), Cm.7874, para.5.22.
J de Larosiere, Financial Supervision, 29.
Mayson. French. Ryan. Company Law 2011-2012, 27th edition, Oxford, 2011
OECD, 2010. CORPORATE GOVERNANCE AND THE FINANCIAL CRISIS : Conclusions and emerging good practices to enhance implementation of the Principles, Paris. p.19.
Walker, D. A Review of Corporate Governance in UK Banks and Other Financial Industry Entities, Final Recommendations (2009)