New guidance on board effectiveness

Updated April 2011

Following the revision to the UK Corporate Governance Code produced last year, the Financial Reporting Council published revised guidance on board effectiveness in March. This guidance replaces the old "Higgs Guidance" which dates back to 2006.

Not surprisingly the guidance largely tracks the UK Corporate Governance Code but expands upon the following areas:

• Board support and the Company Secretary
• Decision Making
• Board Composition and Succession Planning
• Director and Board Performance Assessment
• Audit, Risk and Remuneration
• Relations with Shareholders

The guidance is relatively short, easy to apply and well worth a read by all directors of listed companies, including non-executive directors. The preface to the guidance itself states that the purpose is not to specify the "right way" to apply the UK Corporate Governance Code, but rather to stimulate board's thinking as to how best to apply it.

In line with the recent report by Lord Davis as to the representation of women on boards, the guidance stresses the importance of board diversity and the need to avoid "group think". This is a theme throughout the guidance and it is apparent that it will remain an important concept in corporate governance in the future. Boards should ensure than when applying the UK Corporate Governance Code they also take into account Lord Davis' recommendations.

The guidance also emphasises the importance of proper training and induction for board members, together with a system for ensuring that potential new directors have the time and ability to perform their roles. The importance of monitoring the importance of board effectiveness is also emphasised and boards of FTSE 350 companies are reminded that an external appraisal is required every three years under the new UK Corporate Governance Code.

Directors reading the guidance should also take the opportunity to review how their board currently applies the UK Corporate Governance Code and assess whether any new or amended procedures are now required.

For the full text of the guidance please see Related links.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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