7.3.3.6 Enforcement

Cadbury Committee (1992)

Hampel Committee (1998)

Higgs Committee (2003)

UKCGC (2010)

1. CEO duality

There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognised senior member (BPP 1.2)

Separation of the roles of chairman and CEO is to be preferred, other things being equal, and companies should justify a decision to combine the roles (Rec. 14)

The roles of chairman and CEO should not be exercised by the same individual. The division of responsibilities between the chairman and CEO should be clearly established. It should be set out in writing and agreed by the board (SCP A.2.1)

The roles of chairman and CEO should not be exercised by the same individual. The division of responsibilities between the chairman and CEO should be clearly established, set out in writing and agreed by the board (A.2.1)

2. Senior director

Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognised senior member (BPP 1.2)

Whether or not the roles of chairman and CEO are combined, a senior NED should be identified in the annual report, to whom concerns can be conveyed (Rec. 15)

A senior independent director should be identified in the annual report. He should be available to shareholders if they have reason for concern on which contact through the normal channels of chairman or CEO is inappropriate or has failed to resolve (SCP A.3.6).

The board should appoint one of the independent NEDs to be the senior independent director to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director should be available to shareholders if they have concerns which contact through the normal channels of chairman, CEO or other executive directors has failed to resolve or for which such contact is inappropriate (A.4.1)

3. Number of N E D s o n t h e board

The board should include NEDs of sufficient calibre and number for their views to carry significant weight in the board’s decisions (BPP 1.3). To meet our recommendations on the composition of sub-committees of the board, all

We consider that, to be effective, NEDs need to make up at least one third of the membership of the board (Rec. 12)

To ensure that power and information are not concentrated in one or two individuals, there should also be a strong executive representation on the board (SCP A.3.2)

Except for smaller companies, at least half the board, excluding the chairman, should comprise NEDs determined by the board to be independent. A smaller company should have at least two independent NEDs (B.1.2)

boards will require a minimum of

three NEDs, one of whom may be

the chairman of the company

provided he or she is not also its

executive head. (Review 4.11)

4. Percentage of board independence

Majority of NEDs should be independent (BPP 2.2)

The majority of NEDs should be independent and boards should disclose in the annual report which of the NEDs are considered to be independent. This applies for companies of all sizes (Rec. 9)

At least half the board, excluding the chairman, should comprise NEDs determined by the board to be independent (SCP A.3.5)

Except for smaller companies, at least half the board, excluding the chairman, should comprise NEDs determined by the board to be independent. A smaller company should have at least two independent NEDs (B.1.2)

5. Definition of independence

Independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement (BPP 2.2). It is for the board to decide in particular cases whether this definition is met. Information about relevant interests should be disclosed in the Directors’ Report (Review 4.12)

Independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement (Review 3.9) We see no objection to paying a NED’s remuneration in the company’s shares, but do not recommend this as universal practice (Rec. 23)

A NED is considered independent when the board determines that the director is independent in character and judgement, and there are no relationships or circumstances which could affect, or appear to affect, the director’s judgement. [The Higgs Committee included seven relationships or circumstances.] The board should identify in its annual report the NEDs it determines to be independent. The board should state its reasons if a director is considered independent not withstanding the existence of relationships or circums-tanceswhich may appear relevant to itsdetermination. (SCP A.3.4).

The board should identify in the annual report each NED it considers to be independent. The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director [The UKCGC 2010 included seven relationships or circumstances.] (B.1.1)

6. Maximum tenure

NEDs should be appointed for specified terms and reappointment should not be automatic (BPP 2.3)

There should be no fixed rules for the length of service or age of NEDs, but there is a risk of their becoming less efficient and objective with length of service and advancing age, and boards should be vigilant against this (Rec. 19) Al1 directors should submit themselves for re-election at least every three years, and companies should make any necessary changes in their articles of association as soon as possible (Rec. 17)

NEDs would normally be expected to serve two terms of three years subject to continued satisfactory performance, but may exceptionally serve longer where this would be in the interests of the company and the reasons are explained to shareholders. NEDs serving nine years or more should be subject to annual re-election. (SCP A.7.3).

NEDs should be appointed for specified terms subject to reelection and to statutory provisions relating to the removal of a director. Any term beyond six years for a NED should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board (B.2.3)

7. Audit committee

The board should establish an audit committee of at least three NEDs with written terms of reference which deal clearly with its authority and duties (BPP 4.3)

Each company should establish an audit committee of at least three NEDs, at least two of them independent. We do not favour a general relaxation for smaller companies, but recommend shareholders to show flexibility in considering cases of difficulty on their merits (Rec. 48)

The board should establish an audit committee of at least three members, who should all be independent NEDs. At least one member of the audit committee should have significant, recent and relevant financial experience (SCP D.3.1)

The board should establish an audit committee of at least three, or in the case of smaller companies two, independent NEDs. In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent NEDs, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience (C.3.1)

8. N o m i n a t i o n committee

Not mentioned

Companies should set up a nomination committee to make recommendations to the board on all new board appointments (Rec. 16)

All listed companies should have a nomination committee which should lead the process for board appointments and make recommendations to the board. The nomination committee should consist of a majority of independent NEDs. It may include the chairman of the board, but should be chaired by an independent NED. The chairman and members of the nomination committee should be identified in the annual report (SCP A.4.1)

There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent NEDs. The chairman or an independent NED should chair the committee, but the chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship. The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board (B.2.1)