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June 01, 2010
UK-Based Financial Reporting Council Recommends End to Staggered Corporate Boards
    by Robert Kropp

The organization’s updated UK Corporate Governance Code asserts that board accountability would be improved by annual elections of directors.

In an effort to address corporate governance failures revealed in the aftermath of the global financial crisis, the UK-based Financial Reporting Council (FRC) last week issued an updated version of the UK Corporate Governance Code. Formerly known as the Combined Code, the document applies to companies in the FTSE 350 index, whose constituents are the largest companies in the UK.

The most significant change to the code, according to the FRC, will increase board accountability by recommending that “all directors of FTSE 350 companies should be put forward for re-election every year.” Implementation of the change would replace the common practice of staggered board elections, in which one-third of directors are put up for election every year. Critics of staggered boards argue that the practice delays or prevents effective oversight by shareowners of corporate governance.

Pensions Investment Research Consultants (PIRC), the UK-based proxy advisory form that has been advocating for the adoption of annual elections for entire boards since 1999, welcomed the FRC’s recommendation. Alan MacDougall, PIRC’s managing director, stated, “If shareholders are going to act more effectively as owners then they need appropriate rights to facilitate that role.”

Furthermore, MacDougall continued, “It was clear that mainstream investor opinion had swung behind this reform.”

On the other hand, two major UK-based pension funds—the
Universities Superannuation Scheme (USS) and Hermes—have criticized the recommendation, arguing that shortening the tenures of directors could lead to a short-term outlook.

In the US, where approximately half of S&P 500 companies have staggered boards, many sustainability investors have called for their elimination, arguing that the practice leads to entrenchment and reduced shareowner value. In a 2008 shareowner resolution filed by
California Public Employees' Retirement System (CalPERS), the pension fund stated that “annual elections for directors provide greater accountability to shareowners.”

Additional changes to the UK Corporate Governance Code include measures to improve risk management, align executive compensation with performance, and enhance board independence.

In June, the FRC will release its Stewardship Code for Institutional Investors, which will “cover the development and encouragement of adherence by institutional investors to best practice in stewardship of UK listed companies.”


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