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Revised corporate governance code to come into effect

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The directors of the UK’s largest companies will have to be re-elected on an annual basis as part of a revised code of corporate governance.

The revised code has been launched by the Financial Reporting Council (FRC) and has the backing of the government.

Directors of the top 350 companies will have to face an annual, rather than a three-yearly, vote in order to continue in their roles.

The revised code also requires that gender and diversity are taken into account when new board members are appointed.

And the new guidance seeks to link the pay of top executives more closely with the long-term performance of the companies over which they have stewardship.

The code, which comes into effect for financial years beginning on or after 29 June, will operate according to a ‘comply or explain’ method of enforcement. Companies must either follow the code or offer an explanation as to how else they are promoting good governance.

Companies outside the FTSE 350 index are exempted from the requirements for annual re-election of directors and external evaluation by consultants.

Baroness Hogg, the chairman of the FRC, said: “The FRC responded to the financial crisis by examining the questions it raised about corporate governance and thoroughly reviewing the code.”

The government welcomed the introduction of the new code.

Business Minister, Edward Davey said: “Corporate accountability and transparency is integral to rebuilding public trust in the corporate sector and today’s new Corporate Governance Code marks an important step towards rebuilding that trust.

“Alongside the pledges this government has made to encourage gender equality on the boards of listed companies, these new measures will help to encourage companies to play their part in working towards the creation of a more responsible, fair and transparent corporate society.”

Lynne Featherstone, the Equalities Minister, added: “Half of all consumers are female but only 12 per cent of FTSE 100 directors are, so I’m pleased to see the FRC recognising the need to get more women into the boardroom. A more equal workplace is a more successful workplace and the stronger provision on gender diversity in the new Code is an important step towards building a fair and equal society by tackling discrimination at work.”

Richard Lambert, the CBI’s director-general, said that the FRC had rightly stuck with guiding principles rather than imposing hard-and-fast rules that could fail to reflect individual companies’ cultures and circumstances.

Mr Lambert also supported the decision to exempt smaller companies: “Without the exemption, smaller firms would have been hit by disproportionate costs.”

But he warned that the CBI remains “concerned that annual re-election may pose problems for larger companies”, adding that it could promote a focus on short-term results, make boards less stable and discourage robust challenges in the boardroom.