Combined code

Combined code

The Combined Code on Corporate Governance (from here on referred to as 'the code') is a set of principles of good corporate governance and provides a code of best practice aimed at companies listed on the London Stock Exchange. It is overseen by the Financial Reporting Council and its importance derives from the Financial Services Authority's Listing Rules. The Listing Rules themselves are given statutory authority under the Financial Services and Markets Act 2000 [Financial Services and Markets Act 2000 [ s.2(4)(a)] and generally [ Part VI] ] and require that public listed companies disclose how they have complied with the code, and explain where they have not applied the code - in what the code refers to as 'comply or explain'. [Listing Rule [ 9.8.6(6)] ] Private companies are also encouraged to conform; however there is no requirement for disclosure of compliance in private company accounts. The Combined Code adopts a principles-based approach in the sense that it provides general guidelines of best practice. This contrasts with a rules-based approach which rigidly defines exact provisions that must be adhered to.


The Combined Code is essentially a consolidation and refinement of a number of different reports and codes concerning opinions on good corporate governance. The first step on the road to the initial iteration of the code was the publishment of the Cadbury Report (1992). The Cadbury Report was a response to major corporate scandals associated with governance failures in the UK (such as Robert Maxwell's executive abuses). The result of this was the accompanying Cadbury Code; the first explicit guidelines on corporate governance in the UK.

In 1995, the Greenbury committee was set up; intended as a 'study group' on executive compensation; the result of which was the Greenbury Report of 1995. Following this the Hampel report drew upon both Cadbury and Greenbury as well as elaborating on their recommendations and others that it considered to be relevant (including the roles of executive directors, non-executive directors and institutional investors). It is the Hampel Report, that the first iteration of The Combined Code is based upon.



;A DirectorsThis sets out the requirements for non-executive directors. The appointments committee should be run by NEDs and their independence should be assured by absence of previous or present personal or business links.

;B Remuneration This sets out guidance for the committee which determines director remuneration. Its principle is that of performance related pay. It is meant to complement the rules in the Companies Act 2006 which require a say on pay by the general meeting. The remuneration committee is meant to be composed of NEDs, although it allows for the Chairman of the board of directors to sit in.

;C Accountability and Audit Here rules are discussed about the audit committee, which is meant to be composed of only independent non-executive directors. In the wake of the Enron scandal, more emphasis has been placed on high standards of integrity.

;D Relations with Shareholders This part sets out the best practice of maintaining good relationships with shareholders and keeping them well informed on company affairs.

Institutional shareholders

;E Institutional Shareholders These provisions deal with a unique part of the UK financial market structure, which is great involvement and influence of institutional investors.


;Schedule A Provisions on the design of performance related remunerationThis goes into more detail about the problem of director pay.

;Schedule B Guidance on liability of non-executive directors: care, skill and diligence 22Under s.172 of the Companies Act 2006 the board of directors' duty of competence was codified. Always pre-existing in the common law, directors are liable on ordinary principles of negligence for a failure to show a reasonable standard of competence. This statement is designed to strengthen a presumption that non-executive directors will be liable for poor board performance only to the extent of their involvement in the affairs. According to "Dorchester Finance v. Stebbing", ["Dorchester Finance v. Stebbing" [1989] BCLC 498] a case on wrongful trading under the Insolvency Act 1986 s.214, non-executive directors are liable just the same as executive directors. What Schedule B here is trying to make clear is that the contribution towards negligent default will differ between executives and non-executives.

;Schedule C Disclosure of corporate governance arrangementsThis sets out a checklist of which duties must be complied with (or explained) under Listing Rule 9.8.6. It makes clear what obligations there are, and that everything should be posted on the company's website.

Code compliance?

In its 2007 response to a Financial Reporting Council consulation paper in July 2007 Pensions & Investment Research Consultants Ltd (a shareholder representative body) reported that only 33% of listed companies were fully compliant with all of the Combined Codes provisions. [PIRC, [ Review of the impact of the Combined Code] (2007)] Spread over all the rules, this is not necessarily a poor response, and indications are that compliance has been climbing. PIRC maintains that poor compliance correlates to poor business performance, and at any rate a key provision such as separating the CEO from the Chair had an 88.4% compliance rate.

The question thrown up by the Combined Code's approach is the tension between wanting to maintain "flexibility" and achieve consistency. The tension is between an aversion to "one size fits all" solutions, which may not be right for everyone, and practices which are in general agreement to be tried, tested and successful. [e.g. this [ humourous grumbling] from a "Financial Times" columnist] If companies find that non-compliance works for them, and shareholders agree, they will not be punished by an exodus of investors. So the chief method for accountability is meant to be through the market, rather than through law.

An additional reason for a Code, was the original concern of the Cadbury Report, that company's faced with minimum standards in law would comply merely with the letter and not the spirit of the rules. [para 1.10 of the Cadbury Report]

The Financial Services Authority has recently proposed to abandon a requirement to state compliance with the principles (under LR 9.8.6(5)), rather than the rules in detail themselves.

ee also

* Corporate Governance
* Cadbury Report (1992), "Financial Aspects of Corporate Governance", on corporate governance generally. Pdf file [ here]
* Greenbury Report (1995) on director remuneration. Pdf [ here]
* Hampel Report (1998), review of corporate governance since Cadbury, pdf [ here] and online with the EGCI [ here]
* Turnbull Report (1999) on internal controls to ensure good financial reporting
* Myners Report (2001), "Institutional Investment in the United Kingdom: A Review" on institutional investors, Pdf file [ here] and "Review of Progress" Report [ here]
* Higgs Report (2003) "Review of the role and effectiveness of non-executive directors". Pdf [ here]
* Smith Report (2003) on auditors. Pdf [ here]


External links

* [ Full text of the combined code 2006]
* [ Full text of the combined code 2003]

* The Financial Services Authority Listing Rules [ online] and in [ pdf format] , under which there is an obligation to comply with the Combined Code, or explain why it is not complied with, under LR 9.8.6(6).

* The Financial Reporting Council's [ website]

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