7.2.6 The enforcement of the requirements regarding independence

This subsection addresses the enforcement of independence. Although regulations and law regarding independence may be in place, without enforcement of regulations and law there might be no benefits. Therefore this final issue is important for the discussion about independence.

All UK-registered companies with a Premium Listing of equity shares need to apply chapter 9 of the Listing Rules (LR) about continuing obligations, according to LR 9.1.1(R). These are the companies that are admitted to the FTSE UK Indices, such as the FTSE 100, FTSE 250 and FTSE 350 indices. Listings on the FTSE AIM Indices (Alternative Investment Market) are considered to be Standard Listings; chapter 9 of the Listing Rules does not apply to these companies. LR 9.8 provides rules regarding the content of the annual financial report. In this respect, LR 9.8.6(R) requires listed companies incorporated in the United Kingdom to include some additional items in their annual financial report. Companies should include a statement about how they have applied the main principles of the UKCGC, in such a way that it enables shareholders to evaluate the implementation of these main principles (LR 9.8.6(R)(5)). In addition, they should include a statement about whether they have complied with all the relevant code provisions of the UKCGC during the accounting period (LR 9.8.6(R)(6)). This also applies to code provisions concerned with independence. When companies have not complied with all the relevant code provisions of the UKCGC during the accounting period, the company must set out three things. First, which provisions it has not complied with. Second, if the provisions have a requirement of a continuing nature, the period within which, if any, it did not comply with some or all of those provisions. And third, the reasons why the company has not complied with these code provisions (Davies et al. 2008: 14.31).

The Financial Service Authority (FSA) may suspend the listing of a company if the company fails to meet the continuing obligations of listing, according to LR 5.1.2(G)(1). If the listing has been suspended for more than six months, the FSA may cancel the listing (LR 5.2.2(G)(3)). In addition, the FSA may decide to cancel the listing if the company no longer satisfies the continuing obligations, according to LR 5.2.2(G)(2). Other remedies of the FSA are embodied in the Financial Services and Markets Act 2000 (FSMA). The FSA may impose a ‘penalty of such an amount as it considers appropriate’ on a company that has contravened any provision in the listing rules (section 91(1) FSMA). A penalty may also be imposed on a director who was ‘knowingly concerned in the contravention’ or the FSA may publish a statement censuring him (section 91(2) and (3) FSMA) (Davies et al. 2008: 25.40). Although failing to comply with LR 9.8.6(R)(5 and 6) regarding the UKCGC might indeed be a reason for suspension, cancellation or monetary penalties, the sanctions for non-compliance are considered to be extensive (Davies et al. 2008: 14.31).