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Following a request by the Department of Business, Energy and Industrial Strategy (“BEIS”) ICSA has prepared a report assessing the effectiveness of the independent board evaluation process introduced in the 2018 update of the UK Corporate Governance Code (the “UK Code”). ICSA has concluded that the evidence does not suggest widespread market failure in this area, and indeed that in some areas there are signs that the update to the UK Code is having a positive effect, but that there is room for improvement. In particular it believes there is scope for broader adoption of good practices and greater transparency by both companies under review and reviewers. To this end, it has made a number of recommendations. These include introducing a voluntary code of practice and register for board reviewers, a set of voluntary good practice principles for companies and guidance for listed companies on how to report on their board performance reviews in line with the UK Code.
ICSA recommended that a voluntary code of practice should be introduced for organisations undertaking external board performance reviews. This is initially to be focused on organisations which are performing those reviews for FTSE 350 companies, or aspire to do so, but it is clear that ICSA would like to see the code adopted more widely.
A proposed code, which adopts the approach of having high level principles accompanied by guidance on application, is included in their report, and covers areas such as competence and capacity; independence and integrity; client engagements and client disclosure. In alignment with ICSA’s overall approach reviewers who commit to the code will do so on a “apply and explain” basis. The overall thinking is that the transparency produced by compliance should mean that companies and stakeholders are able to understand the approach and qualifications of reviewers, and make an informed assessment of who is the best reviewer for them.
This code of practice is to be supported by the introduction of a public register of board reviewers. Initially the requirements for registration will be light touch, being limited to disclosure of the basis on which the applicant has “applied and explained” the code, but it is anticipated that this will be kept under review and more onerous conditions will be introduced later.
Subject to an appropriate “owner“ of the register being identified by BEIS, ICSA’s recommendation is that it should go live by the end of the year, with details of how registration will take place being announced as soon as practicable to give reviewers a chance to adjust their practices and update their disclosures before it does.
ICSA notes that the UK Code already has extensive provisions dealing with conduct of board evaluations and the appointment of external reviewers, but concluded that there would be value in setting out voluntary good practice principles to which companies could commit and which go further than the UK Code’s “comply or explain” obligations. Again a proposed set of principles is annexed to the report, and are designed to mirror the code of practice for board reviewers.
The principles cover areas such as selection of reviewers, conflicts of interest, agreeing a scope of works, appropriate access and reporting processes, and disclosure of compliance. They also require the reviewer’s agreement be given to certain information about the review to be disclosed in the company’s annual report.
Adoption of these principles is not limited to FTSE 350 companies. Indeed ICSA’s view is that they could be adopted by any entity which undertakes board evaluations.
The final core element of ICSA’s recommendations is the publication of additional guidance about disclosures listed companies (not just FTSE 350 companies) should make in relation to their internal and external board review processes. As before suggested guidance is set out in the report.
This suggested guidance focuses on three areas of disclosure in addition to those required by the UK Code:
Again the intention here is to ensure transparency and allow stakeholders to form judgements about the process followed. For example, it is considered that having a reviewer selected by only one person within the company or without a formal process involving at least two candidates would raise a red flag.
ICSA has also concluded that as a matter of good practice reviewers should be given the opportunity to ensure they are comfortable with the disclosures being made in the company’s annual report in relation to the description of the review process and any comments which purport to represent the reviewer’s opinion. Companies complying with the guidance are required to confirm that they have agreed the relevant statements with the reviewer.
In wrapping up its recommendations ICSA recommend that the Financial Reporting Council should review practice and reporting on board evaluations as part of its regular monitoring of the UK Code and report on its conclusions, and also that BEIS should conduct a formal review of the impact of ICSA’s proposed measures three years after the register of review providers goes live. BEIS’s review should consider whether the proposed measures should move from a voluntary to a mandatory basis, whether additional oversight of the board reviewer’s code of practice is required and generally if any changes are needed to the content of the reviewer’s code of practice, the principles for companies or the disclosure guidance.
Board evaluation is clearly an evolving area of regulation. It seems very likely that ICSA’s recommendations will be implemented in the short term, but listed companies and board reviewers can expect further changes as the area matures and the recommended reviews take place.
This blog has been drafted and provided by Kingsley Napley LLP. It should be used for informational purposes only. The information is based on current legislation and should not be relied on as an exhaustive explanation of the law or issues involved without seeking legal advice.
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