In early December we announced the conversion of the UK partnership of Mayer, Brown, Rowe & Maw to an English limited liability partnership. Our firm is the largest legal practice in the UK to have taken advantage of the recent legislation which firstpermitted the establishment of LLPs in April 2001. At the time of the combination of Rowe &Maw and Mayer, Brown & Platt in February 2002, the firm set itself the deadline of achieving LLP status in the UK by November 2002. That we were able to meet this ambitious deadline is due in no small measure to the experience the firm has gained over the years through being at the forefront in the developments in this area of the law. We have advised many professional practices on the advantages of incorporation, including Ernst & Young LLP, the first limited liability partnership established under the new legislation. Turning to the field of company law, the past few months have been notable for a number of developments which will have a significant effect upon the legal terrain through which company directors must tread (and, it seems, tread carefully). For the most part, this issue of Corporate Legal Update is devoted to those developments and, in particular, to providing an overview of some of the principal corporate governance changes and proposals over the past few months which affect UK company directors. From this question of "best practice" for directors, we end this issue by examining what might constitute "best practice" in terms of a company's document management policies, an issue which has also received much attention of late due to certain high profile cases regarding the destruction of documents, both in the UK and overseas.
Turning to the field of company law, the past few months have been notable for a number of developments which will have a significant effect upon the legal terrain through which company directors must tread (and, it seems, tread carefully). For the most part, this issue of Corporate Legal Update is devoted to those developments and, in particular, to providing an overview of some of the principal corporate governance changes and proposals over the past few months which affect UK company directors. From this question of "best practice" for directors, we end this issue by examining what might constitute "best practice" in terms of a company's document management policies, an issue which has also received much attention of late due to certain high profile cases regarding the destruction of documents, both in the UK and overseas.
Head of Corporate Group (London)
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COMPANY DIRECTORS- RECENT CORPORATE GOVERNANCE DEVELOPMENTS
Foreword by Stephanie Bates, Corporate Finance partner
In recent months, there have been a number of developments which will have a significant effect upon the legal and regulatory framework applying to UK company directors. In the quartet of articles which follow, we look at some of these developments including the recent Higgs Report recommendations about the composition of listed company boards, new regulations governing the way in which directors' remuneration is reported and approved and new areas of potential liability for directors, not only under UK legislation but also, since the advent of the Sarbanes-Oxley Act, under US laws. These are certainly interesting times to be a director.
The roll-call of recent legal initiatives affecting UK directors is long. Since July of last year, it includes:
the Government's publication of its White Paper proposals for company law reform, including the proposed codification of directors' duties (July 2002);
in the US, the signing by President Bush of the Sarbanes-Oxley Act of 2002 (July 2002);
new regulations in respect of the reporting and approval of directors' remuneration (August 2002);
the Enterprise Act, which contains competition law provisions relevant to directors (November 2002); and
the publication of the Higgs Report in relation to non-executive directors and the Smith Report on audit committees (January 2003).
Some of these developments, such as the Higgs report, the directors' remuneration regulations and the requirements of the Sarbanes-Oxley Act, will principally affect directors of listed companies. Others, however, will be of interest to all directors. In our previous issue of Corporate Legal Update (Winter 2002), we summarised some of the key proposals in the Government's White Paper on company law reform, including the proposal to codify the duties owed by directors. In this issue we describe some of these other initiatives.
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THE HIGGS & SMITH REPORTS
The face of corporate governance in the UK is set to change over the next few months. January saw a number of Government-initiated reviews coming to fruition. Derek Higgs has published his independent report on the role and effectiveness of non-executive directors. Sir Robert Smith has issued a report on the role, responsibilities and activities of audit committees. Both recommend wholesale amendments to the Combined Code on Corporate Governance which are expected to take effect on 1 July 2003 once the Financial Reporting Council (FRC), a Government-appointed body responsible for keeping the Combined Code updated, has consulted on the precise wording. The Combined Code applies to UK companies with a full listing on the London Stock Exchange but not to overseas companies listed in London.1
The detailed changes are helpfully summarised in the introduction to the Higgs Report. Here, we examine just a few of them:
At least half a listed company's board, excluding the chairman, will have to be independent non-executive directors and, for the first time, there will be a comprehensive definition of independence in the Combined Code. Companies may face practical difficulties in meeting this requirement in the short term unless the pool of suitable candidates is increased. A small group of business leaders and others will be charged with identifying how to bring to greater prominence potential candidates from the non-commercial sector. Also, companies are encouraged to allow executive directors to take up non-executive posts in smaller non-competing companies, in order to gain experience of the role.
The roles of chairman and chief executive (or chief operating officer) will have to be separated and the division of responsibilities between the two set out in writing and agreed by the board. This requirement has been broadlywelcomed and indeed about 90% of listed companies already split these roles. The report goes further by saying that chief executives should not go on to become chairmen of their own companies as they may find it difficult to relinquish executive control. This latter proposal has been met with some opposition by listed companies since many feel that the chairman's role is enhanced by having a deep and thorough understanding of the business obtained through hands-on experience of running it.
Perhaps more contentious are suggestions that no individual should chair the board of more than one major company and that full-time executive directors should not take on more than one non-executive directorship or become chairman of a major company. Again, this means the pool of potential recruits for senior non-executive posts needs to be deeper.
Role of non-executive director
For the first time, the Combined Code is to contain a formal description of a non-executive director's role and a separate description of the role of the board as a whole. This step was perhaps encouraged by the proposed codification of directors' duties in the UK company law reform process.
There will be limits on the length of a non-executive director's tenure; two three-year terms being the expected norm. Some commentators consider this period too short and that companies may as a result be forced to lose (and find replacements for) talented board members when they are at the peak of their effectiveness.
Non-executives will have to make sure they have enough time to perform their roles taking into account other commitments. They will have to inform the chairman before taking on any other non-executive appointments during their period of office. These are issues which it may be sensible to address in engagement letters.
The report has steered clear of capping the number of non-executive appointments held by any individual, recognising that the optimum number varies depending on the person in question. This has sparked debate in the investment community as some investor bodies would have preferred to see a maximum prescribed.
Non-executive directors will have specific duties to consult directly with investors. As well as attending annual general meetings, they will need to attend meetings with major investors from time to time and should certainly do so on request. There will be a particular onus on the senior independent non-executive director to attend sufficient meetings of management with key investors to develop a proper understanding of their concerns. This proposal has been strongly criticised by listed companies who are concerned that rival formal channels of communication between companies and their shareholders could give rise to conflicting and confused messages...