Following the Enron report, two review committees were commissioned by the UK Financial Reporting Council (FRC) to review UK corporate governance2. The two independent review reports - the Higgs Report on Non-Executive Directors and the Smith Report on Audit Committees, were published in January 2003 and form the bases for the revised Code [also see Higgs review (2003) and Smith review (2003)].
In this analysis the features of the revised combined code will be discussed along with studies to show and suggest whether the implementation of this code is likely to improve the effectiveness of corporate governance for listed companies.
The revised code contains 14 principles for companies supported by 48 code provisions. Many aspects of the revised code have remained unchanged from the original code although there have been many important changes. The code suggests that the board should comprise of independent non-executive directors along with executive directors and the code contains guidance on the meaning of independent directors emphasizing on independence as an important measure (Long et al, 2005). It also lays down the rule that the role of chairman and chief executive should not be a position taken by the same person (in Combined Code, 2003). The chairman should be independent and only in certain exceptional cases, the chairman can also be a former chief executive. It has also been suggested that the position of a senior independent non-executive director should be included. This new position of senior independent non-executive director shows that the director must be identified in the annual report and also be given specific responsibilities (Long et al, 2005).
The other specifications of the revised code show that all listed companies should have an audit committee, a nomination committee and a remuneration committee. The audit and remuneration committees should have at least three members and all the members should be independent non executive directors3. The majority of the members are expected to be independent non executive directors and the committee is also headed by the chairman who is an independent non executive director (Long et al, 2005; Chambers 2005)4. The code also specifies that at least one member of the audit committee must be a financial expert or a person with the relevant financial experience and having membership with a professional accountancy body.
The code highlights on performance evaluation and regular monitoring and emphasises on the performance evaluation of board members and the committees and executive directors (Combined Code, 2003; Directors' Remuneration Report, 2002). The annual report should include a disclosure on the performance evaluation process. The external auditors are important as well and the audit committee is given the primary responsibility of making a recommendation on the appointment, reappointment and removal of external auditors. The audit committee is given the responsibility to develop and implement policy on engagement or taking services of the external auditor to supply non-audit services.
The Audit Committee states in its report that the