Response to EU consultation on the role of independent (non-executive) directors
4 June 2004
A. INTRODUCTION AND SUMMARY
1. We welcome the opportunity to comment upon the Commission’s paper on the role of
non-executive or supervisory directors in listed companies.
2. We are concerned that entrepreneurial activity should be encouraged and that flotation in
Europe should continue to be an attractive option for potential high growth companies, at
a time when IPOs are in decline not only because of the fall of the stock market but also
because of migration of listed companies from the main market to AIM or to private
status. We note that research by the Cranfield School of Management showed that the
number of fully listed companies on the London Stock Exchange has fallen from almost
1,600 in 1997 to a 25 year low of only 910 at the end of 2003. While many of these have
been mergers, some companies have chosen to go private instead. We also understand
that some companies are beginning to look to issue securities in Singapore rather than in
Europe.
3. The UK is generally recognised to have a successful system of corporate governance.
We believe that this has been because corporate governance in the UK has been
business led and because the emphasis has on the whole been given to the principles
behind the code provisions rather than to the provisions as rules. While companies
subscribe to the principles behind the Combined Code, concerns are raised when
investors, government or the media focus not on the spirit but on the rules, because of
the potential for adverse unintended consequences from rigorous application of corporate
governance codes.
4. The CBI welcomed the conclusions of the Weil Gotshal & Manges report, the Winter
Report and the Action Plan, which stated that there was no need for an EU code of
corporate governance. We appreciate that the Commission has stated that it does not
intend to create one. Nevertheless we believe that the Commission’s actions in the detail
of this consultation are clearly inconsistent with its stated intent.
5. Commissioner Bolkestein has stated that the Commission is “fully conscious of the need
to take into account national corporate governance structures and practices”. However,
we are concerned that the Commission proposes to proceed by issuing a
Recommendation containing a set of detailed principles for Member States to introduce
as a minimum, with the possibility of further action later in 2006. Instead of allowing the
markets to work, the Commission paper speaks of “measures aimed fundamentally at
influencing the way in which listed companies are organised….this objective goes much
further than the simple provision of information” i.e. it appears that the Commission has
expressly rejected the Winter Group’s approach of basing corporate governance on
disclosure.
Susannah Haan – Legal Adviser – Company Affairs
DL: 020 7395 8047 DF: 020 7836 1114 E: Susannah.Haan@cbi.org.uk
CBI Centre Point 103 New Oxford Street London WC1A 1DU
T: +44 (0)20 7379 7400 F: +44 (0)20 7240 1578 W: www.cbi.org.uk
Director-General: Digby Jones
President: John Sunderland
6. We therefore fear that the Commission’s proposals will merely add another layer to an
already complex picture of corporate governance, which we believe should remain
focussed on relations between companies and investors. As such, it is best led by
companies and investors themselves, not by governments, regulators and commentators.
7. This is not to say that we disagree with many of the individual proposals per se, and we
recognise the similarities between much of what the Commission proposes and the UK’s
own corporate governance system. Indeed we support the principles upon which the
Commission’s proposals are based. However, the issue for us is that, as the consultation
paper deals with detailed rules which already exist in the UK’s Combined Code, there is
no added benefit for UK companies in having such rules repeated at EU level, while there
is detriment for them in the sense that decisions are taken further away from companies if
taken at EU rather than national level. In addition, the Commission’s proposals are rules
based and as such appear to be an attempt to dictate the contents of national codes.
Since we believe that the “comply or explain” approach works best on the basis of buy-in
by companies, this could undermine the governance process which has worked so well in
the UK.
8. We therefore consider that the proposals need a fundamental rethink and believe that
national parliaments need to be more involved in the area of company law and corporate
governance in considering the question of what should be dealt with at EU or at national
level. If there is to be any EU action, we believe that it should be at the level of principles,
not rules, and that there needs to be buy-in from both companies and investors.
B. BACKGROUND
9. Following corporate scandals such as Enron and Parmalat, it is understandable if some
of the confidence and trust rightly placed in the boards of directors of listed companies
properly to exercise their legal and fiduciary responsibilities for the stewardship of the
business may have been tarnished.
10. In the UK, we experienced our own sudden corporate collapses at the end of the 1980s,
which led to the establishment of the Accounting Standards Board, much more rigorous
accounting standards, and the Cadbury Committee’s Code of Corporate Governance,
since further developed by the Hampel Committee and the Combined Code. The UK has
therefore in many ways led the world in its accounting standards and corporate
governance systems. Nevertheless, CBI member companies are not complacent, but
support the recent revision of the UK’s Combined Code following the review by Derek
Higgs in order to enhance companies’ standing and reputation amongst both institutional
investors and private individuals who invest through their savings and pension schemes.
11. Effective procedures need to be in place to ensure the proper governance of a company.
However, such procedures cannot operate as an insurance policy against loss. It must
be clearly understood that from time to time companies will fail. No amount of corporate
governance guidance or legislation can prevent this. And there is a realistic limit to what
can be expected from NEDs in the limited time available to them, particularly when the
company is doing what the market wants.
12. Investors must understand that even the best management, with the highest integrity,
cannot guarantee success and constantly increasing value. Investors buy equities in
order to obtain a higher reward than is available from other types of investment. To obtain
a higher reward, a higher element of risk must be undertaken. Equities can never be risk
free by their very nature.
13. If too much concentration is put on avoiding loss through over regulation, then
entrepreneurial spirit, business development and innovation will be stifled. Where
corporate failures and abuses involve fraud or other culpable conduct, even the most
sophisticated regulation cannot protect completely against the fraudster. Accordingly,
recommendations coming out of this and other reviews should be aimed at the better and
more efficient operation of companies, and towards greater productivity among
companies, as well as towards heightening standards of integrity and governance.
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Reproducing at EU level what is already in national codes will merely add another layer
of bureaucracy to the process and will not assist better governance. On the contrary,
since the “comply or explain” approach works on the basis of buy-in by companies, it is
likely to undermine the governance process.
C. ROLE OF NON–EXECUTIVE DIRECTORS
14. Good governance is based on balanced boards led by a strong chairman and a strong
independent element. The board of a company needs to comprise the best people to give
strategic direction and contribute management skills and expertise to the business. It
should be composed so that the best skills are available to make sure the company is
well run and well directed, with integrity, so as to maximise value for shareholders. It is
the chairman’s role to ensure that an appropriate balanced board is in place.
15. Previous UK corporate governance reports have identified the role of non–executives in
developing with the executive directors the board’s key strategies and objectives for the
business, in reviewing the performance of the executive management in their
implementation, and in dealing with corporate governance issues and issues where there
is or might be a conflict of interest. As noted by the Cadbury Report, what is
fundamentally important is for the executive and non-executive directors to operate as an
effective and cohesive team.
16. One of the key roles of the board is to make sure that all the appropriate financial and
other controls are in place and that risk is properly assessed. The board should be
assisted in this by the board committees but it is important to recognise that nonexecutive directors are not and never can be a universal panacea for all ills. They are not
full-time executive directors and cannot have the same detailed knowledge of the
company as those directors, nor do they have the same amount of time to spend in
meetings, etc.
17. Just as there are many different types of company, so there will be different types of nonexecutive, bringing different strengths to the Board. They can and should add value to
boards, and be seen to do so, but too great an expectation of what non-executive
directors can achieve runs the risk of discouraging individuals from wanting to put
themselves forward for such positions and of limiting the potential pool of those available.
This is particularly likely to impact smaller companies, a key source of entrepreneurial
growth in the pursuit of Europe’s Lisbon goals.
18. What NEDs should offer depends on the size and scale of the business but the critical
requirements are:
- Financial literacy
- Commercial awareness and relevant previous experience
- Integrity and an open mind
19. Collectively there should be a balance of skills and wide ranging experience appropriate
for the particular company and its objectives. It is vitally important that people are
encouraged to become non-executive directors. A proliferation of corporate governance
guidelines tends to put off many people who might otherwise become directors, who are
beginning to ask whether they will have to spend more time on governance than on the
business. What are needed are people who can contribute to the business and the
generation of wealth, which is the prime purpose for the company’s existence.
D. COMPLY OR EXPLAIN
20. The success of the Comply or Explain philosophy depends on two key factors:
companies understanding and accepting the philosophy behind the Code, and investors
being prepared to put the necessary effort into looking at the explanations.
21. As stated in the 1992 Cadbury Report, the Comply or Explain route should enable
companies to “strike the right balance between meeting the standards of corporate
governance expected of them and retaining the essential spirit of enterprise… Raising
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standards of corporate governance cannot be achieved by structures and rules alone.
They are important because they provide a framework which will encourage and support
good governance, but what counts is the way in which they are put to use.”
22. The Cadbury Report and its successors were successful precisely because business has
supported the codes we have had so far in the UK. Companies have understood the
philosophy behind the codes and have been prepared to make changes to the way they
ran boards. Since the responsibility for putting the Code into practice lies directly with
boards of directors of listed companies to whom it is addressed, there needs to be buy-in
from companies, which was achievable since the recommendations were perceived to
have been business led.
23. In this respect, we welcome the opportunity for consultation in the publication of the
Commission’s paper but believe that the short timescale both for consultation and for the
final recommendation will prevent the Commission’s proposals from gaining widespread
buy-in and acceptance. This is especially the case since it has been perceived by
companies that the Commission’s proposals cover a wider remit than had been indicated
by the Winter Report and the Action Plan.
24. We note that the Cadbury Report and others had a period of debate after publication of
an initial draft report in order to ensure that the final outcome was as clear and as widely
accepted as possible. The Cadbury committee did change a lot of its views between the
initial and the final report. We believe that this readiness to accept changes and to listen
to comments made was a source of its strength (and indeed of the subsequent bodies
through to the most recent review of non-executive directors by Derek Higgs) and thus of
the support which it has enjoyed to the present day, not just in the UK but elsewhere.
25. We therefore consider it essential that the Commission publish a draft recommendation
for comment on the specific wording and that there be a full and proper debate with
companies, investors and national bodies such as the FRC as to the final version.
Despite widespread criticisms of the Higgs Report in the UK last year, a period of public
debate allowed consensus to be reached without compromising support of either
companies or investors. This is critical to the comply or explain approach.
26. We believe that Comply or Explain is itself key to the success of corporate governance.
We believe that to explain is to comply. Companies should either conform to the
provisions of national codes, or provide an explanation as to how the principles have not
been followed. Of course, this means that there must be a proper explanation for
investors to consider, but once that has been given, the company has in effect complied
with the code. Investors are of course free to agree or disagree with the explanation and
to enter into a dialogue with the company. We believe that the Comply or Explain regime
will operate successfully over the long term only if investors demand that companies
explain how they have complied with the principles underlying the provisions. Focusing
purely on compliance with code provisions provides neither a basis for effective
accountability nor for good governance.
27. The provisions in national codes are guidelines and not commandments. They represent
best practice rather than minimum standards. Best is not viewed as the only practice
since no single Code can meet all the requirements of all companies all of the time and
there will always be explanations. This should not be seen as a bad thing. On the
contrary, this is precisely the reason why comply or explain works well. We are
concerned that the Commission paper refers to minimum standards rather than best
practice, which is inconsistent with the comply or explain approach.
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SPECIFIC COMMENTS ON COMMISSION PAPER
1. The Form
1.1. Legal basis
We do not believe that the conclusions of the Oviedo Council gave the Commission the
mandate to produce such a detailed draft. The Council agreed with the Winter Report that
there was no need for an EU corporate governance code and we believe that the current
proposals run counter to the Council’s decisions.
1.2. Addressees
We agree that any recommendation should be addressed to the Member States not to
companies.
1.3. Comply or explain
We strongly support the comply or explain approach but believe that this should be a
matter of national not Community law. We are concerned that the Commission’s
proposals may undermine this approach. Any recommendation should simply refer to the
“comply or explain” approach and should not specify how this is to be implemented at
Member State level.
As a matter of language, we would prefer that the Commission should refer not to
“deviations” which has a pejorative ring, but rather to situations where the company has
chosen to explain rather than to comply.
1.4. Implementation and follow up
We agree that it would be helpful for member states to report to the Commission on what
their different national codes contain, particularly since the accession of the new member
states and the fact that some countries such as Sweden have only just introduced a code
in the past few weeks. However, we are less supportive of the need for further action at
Community level in 2006 if some member states have done less than others. There
should be no presumption in favour of further action; the emphasis should remain on
national codes. Companies in member states such as the UK with more extensive codes
should not be subject to additional EU recommendations and thus to a lessening of the
influence of the national code on the basis that there are less extensive codes in other
member states.
Any review should not necessarily lead to Community action but rather to dialogue with
those member states and also to greater dialogue between companies and investors in
those states. We remain ready to assist in any dialogue.
2. The Substance
2.1. Scope
Overall the scope is too wide. We cannot see how detailed rules at EU level can fail to
undermine national codes. The content of the proposals are therefore at odds with the
Commission’s stated aims.
2.1.1. Listed / non listed companies
We do not agree that the contents of any recommendation should be extended to
non-listed companies. The justification for additional measures for listed companies is
their access to capital markets and thus for the need for shareholder protection.
Unlisted companies do not have the same access to shareholder funds and thus the
same public policy reason for disclosure does not exist.
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2.1.2. EU / other companies
We agree that any recommendation should apply only to companies listed in the EU.
2.2. Board committees
2.2.1. Two systems of board structure
The majority of CBI members strongly believe in a unitary Board, and support the
view that all directors, whether executive or non-executive, should have the same
responsibilities under company law, although the extent of individual liability may
differ depending on the facts of the case, as determined by the courts.
Any distinction between the legal responsibilities of executive and non-executive
directors would create a de facto two tier Board. While some may prefer the two tier
structure, this should be a matter of individual company choice. We agree that the
Commission should not state a preference for either type of structure.
We support the statement that: “The administrative, managing and supervisory
bodies should include an overall balance of executive / managing and non-executive /
supervisory directors (and in particular independent non-executive or supervisory
directors) such that no individual or small group of individuals can dominate the
decision taking.”
We do not believe that the Commission should add anything to this statement.
Further provisions should be left to national codes.
2.2.2. Composition of board
We agree with the wording: “A number of independent directors should be elected to
the (supervisory) board of companies that is adequate in relation to the total number
of non-executive or supervisory directors and significant in terms of
representativeness.”
We do not believe that the Commission should add anything to this statement.
Further provisions should be left to national codes.
2.2.3. Chairman / CEO
We agree that this should be left to national codes and to market pressure.
2.2.4. Nomination, Remuneration and Audit Committees
We would have no objection to a statement of principle limited to wording along the
lines that the creation of nomination, remuneration and audit committees is generally
regarded as best practice. However, we do not see the need for further provisions
since these are in effect detailed rules which should be left to national codes.
We note the reference to “public interest entities” in the 8th directive but are not quite
clear to which entities this might refer. Clarification would be welcome.
We have previously voiced our objections to the Commission’s proposals to include
audit committees in the 8th company law directive. We believe that audit committees
should remain part of national codes and should not be set in stone in legislation at
either national or EU level.
We do not agree that more detailed provisions on the audit committee’s composition,
role, operation and transparency are needed in either the 8th directive or in the
recommendation.
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2.2.5. Role of committees towards board
We note that the Commission proposes to state that the committees should make
recommendations aimed at preparing the decisions to be taken by the (supervisory)
board itself, referring to their purpose, which is to increase the board’s efficiency, to
avoid conflicts and not to remove matters from the board itself. We would not agree
that this represents the best explanation of the functions of the various committees
but believe that it would be better to leave such matters to national codes.
The UK’s unitary board system means that all directors, executive and non-executive,
are jointly responsible for the management and stewardship of the business. As part
of this, the board committees are just that, namely committees of the board, and
operating under the authority and terms of reference assigned to them. These
arrangements clearly remain under continuous review by the board and by the
chairman in particular. As such, they need to remain flexible.
2.2.6. Flexibility in setting up committees
We agree that companies should remain free to decide on the arrangements
appropriate to their particular circumstances. In particular, smaller quoted companies
may need much greater flexibility in their board arrangements. They may have only
recently emerged from private status and have a more entrepreneurial character,
which it would be counter-productive to change too rapidly. They are often focussed
on a more limited range of products or services than larger companies. Major
shareholders are often directors, either executive or non-executive, so that the
governance issues may be different to those of larger companies. Finally, such
companies may experience more difficulties in recruiting non-executives.
The role of the NED varies enormously from the FTSE100 company to (when they
are present at all) the private company. In smaller entrepreneurial companies, where
the directors may have a substantial or controlling interest, there is even greater
emphasis on the NED’s potential contribution to the growth and business strategy of
the company. The typical role of the NED in a smaller listed company lies somewhere
in the middle. Such companies are, or should be, primarily focussed on business
growth. The appointment of NEDs needs to reflect this. What is appropriate
experience will vary from company to company.
2.3. Profile of (independent) non-executive or supervisory directors
We believe that issues of competences, term of office and independence should be left to
national codes to determine in discussions between companies and investors.
Regarding terms of office, many CBI members have stressed that it takes many non–
executives a number of years to make a maximum contribution, and companies do not
want to lose many of their non–executives at their peak. While inductions and training
should assist directors up get up to speed more quickly, length of experience will still be
highly desirable. For example, banks may wish to have someone with experience of both
bull and bear markets on their boards. Such expertise is more likely to ensure investor
protection and should be encouraged. An unnecessary focus on rules rather than
effectiveness regarding terms of office and independence could cause companies
unnecessarily to lose some of their best directors and weaken the overall quality and
effectiveness of the board.
2.3.1. Qualifications
We agree that the question of what constitutes proper qualifications for directors
should be left to the company itself. However, the Commission proposes to include in
its recommendation a statement to the effect that: “The (supervisory) board should
draw up a desired profile of itself and evaluate it periodically. The (supervisory) board
should ensure that it is composed of members who, as a whole, have the required
diversity of knowledge, judgement and experience to properly complete their tasks.”
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While we agree with the sentiment, again we wonder whether this is best dealt with at
EU level or by national codes.
The Commission also proposes to specify that: a) at least one audit member must
have recent and relevant experience which results in the individual’s sophistication in
finance and accounting and b) all other members of the audit committee should be
able to read and understand financial statements at the time of their appointment.
This is essentially a detailed rule and should be left to national codes. We do not
therefore agree that this should form part of any Commission recommendation.
This would in any event be a significant burden on a single individual and may make
it more difficult to recruit the right people. For example, someone who had been a
Finance Director 5 years ago would bring relevant but not recent financial experience.
At first sight this might appear to be in the nature of a drafting point, but is in fact
considered quite important. The experience of members of the audit committee has
also arisen in the context of Sarbanes–Oxley and its implementation by the SEC.
Although this has been an issue in the US, we have some doubts as to the long term
practicality of these proposals, since we understand that US companies are refusing
to identify such an individual because that person is unable to obtain insurance
against the perceived risks. It may be better for such requirements to be expressed
as referring to the audit committee itself rather than to one specific individual.
We would also not agree that the Commission should specify that directors should
follow a formal and tailored induction programme on joining the board nor that boards
should conduct an annual review. Again these are more detailed rules rather than
principles and should be dealt with by national codes.
Currently NEDs in the UK are normally appointed for a renewable three-year term,
which we support. The independence of a NED, when held out as such, should be
kept under review by the chairman and the board. The NED’s overall performance,
including level of contribution, board attendance and other positions accepted, should
be kept under review by the board before a decision is made on reappointment. This
is already part of the UK code and we do not see the need for duplication of rules at
EU level.
While we agree in principle that companies should disclose on appointment the
competencies of the relevant directors, we do not believe that this should be dealt
with by an EU recommendation but should rather be left to national codes.
We also disagree that the Commission should specify that the board’s annual report
should contain a profile of its composition and an explanation as to why individual
directors are qualified to serve on the board. Again this should be a matter for
national codes.
2.3.2. Commitment
We agree that the Commission should not set a limit on the number of directorships
which an individual should hold. The CBI opposes any statutory or other restrictions
on the number of non-executive positions an individual may hold. Clearly the
individual must be able to have the time to make an effective contribution. What this
means, however, will depend on the nature of other commitments rather than their
number e.g. a business in crisis will take up more time than one doing well. Therefore
all the circumstances have to be taken into account and numerical limits would not be
appropriate. The time commitment and availability is primarily a matter for the
individual concerned and for the board on which they sit, or is invited to join, and
should be kept under review by the chairman as part of the performance review
process.
The time commitment depends entirely on the size and complexity of the business.
The number of positions anyone can take up depends on the time each person has
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available. For example, someone who has no executive commitments could obviously
take on more roles. It is impossible to state a specific number. This is an issue to be
considered by the Board when initially recruiting the individual. Each Board, and in
particular the Chairman, should satisfy themselves by way of a performance /
attendance review that the NED is spending enough time with the company to fulfil
his duties.
We would support the wording: “Each director should apply to his duties the
necessary time and attention, and should undertake to limit the number of any
directorships held in other companies to such an extent that the proper performance
of his duties is assured.”
We agree in principle that directors should disclose significant other commitments on
appointment and should inform the board of subsequent changes but again wonder
whether this needs to be dealt with at EU level.
2.3.3. Independence
We note that the Commission proposes to include a general statement on
independence together with some “minimum standards”. We support the general
statement: “A director is considered to be independent when he is free from any
business, family or other relationship – with the company, its controlling shareholder
or the management of either – that creates a conflict of interest such as to jeopardise
exercise of his free judgement.”
We do not, however, agree that the EU should set minimum standards on
independence. Instead this should be left to national codes. We do not therefore
agree with the proposed minimum criteria for independence.
We agree that directors’ shareholdings are intended to align the interests of the
directors with those of the shareholders and that these should not be relevant to a
definition of independence.
We also agree that the ultimate responsibility for the composition of the board rests
with the board itself and that the board should be able to determine whether or not an
individual is independent, regardless of any formal definitions of independence.
We believe that it should be left to national codes to determine whether to require
annual disclosure of independence. We do not agree that the Commission
recommendation should refer to such disclosure nor to periodic reviews of
independence.
We believe that independence is in the mind and depends entirely on the quality of
the non-executive director. Someone can be “independent” in the sense of having no
apparent conflicts by way of previous employment, family history, etc. and yet not be
able to say “boo” to the proverbial goose. Another may have an outside interest,
which may be a potential conflict, and yet speak out frankly. Therefore some of the
existing definitions of independence are a distraction. It should be for the board to
decide whether someone is independent. Independence is not something for which
you can legislate. Any connections or circumstances, which could lead to potential
conflicts of interest, should be stated; transparency and disclosure is everything. It
may be worth noting that in many companies’ experience, often “non-independent”
directors representing shareholder interests are the most likely to take on the
management. While FTSE 100 companies may feel better able to comply with all of
these provisions, those companies outside the FTSE100 may find it more difficult and
will require more flexibility.
We do not agree that the recommendation should include a general statement about
the duties of independent directors. This should be left to national codes as directors’
duties are so closely related to national legislation. The UK Company Law Review
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proposed to bring forward a definition of directors’ duties in national legislation and
we believe that this is the way forward for the UK.
2.4. Board committees: common features
We do not agree that the recommendation should contain minimum standards on each of
the nomination, remuneration and audit committees. Instead we believe that these are
matters better left to national codes. We do not therefore comment in detail upon the
specific proposals as we disagree that these should be dealt with at EU level. These
proposals are essentially detailed rules and should be abandoned.
2.4.1. Size of committee
We believe that this is best left to national codes.
2.4.2. Composition of committee
We believe that this is best left to national codes.
2.4.3. Terms of reference
We believe that this is best left to national codes.
2.4.4. Available resources
We believe that this is best left to national codes.
2.4.5. Attendance at committee meetings
We believe that this is best left to national codes.
2.4.6. Transparency
We believe that this is best left to national codes.
2.5. Nomination Committee
We note that the Commission has responded to the views expressed about the
composition of this committee during the consultation period and we welcome this.
Nevertheless, we believe that the detail of the committees is best left to national
codes.
2.5.1. Composition
We believe that this is best left to national codes and do not believe that the
recommendation should state that the CEO must be among members of the
nomination committee.
2.5.2. Role
We believe that this is best left to national codes. As stated before, the Commission’s
proposals are far too detailed and are effectively rules not principles.
2.5.3. Operation
We believe that this is best left to national codes.
2.5.4. Transparency
We believe that this is best left to national codes.
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2.6. Remuneration Committee
We note that the role and responsibilities of the remuneration committee in the UK,
although not prescribed by statute, will in practice be heavily controlled and influenced by
the recent Directors’ Remuneration Report Regulations.
2.6.1. Composition
We believe that this is best left to national codes.
2.6.2. Role
We believe that this is best left to national codes.
We query the need for a recommendation on directors’ remuneration as well as the
detailed proposals in this paper since there would appear to be some duplication.
2.6.3. Operation
We believe that this is best left to national codes.
2.6.4. Transparency
We believe that this is best left to national codes.
2.7. Audit Committee
Ultimately the board as a whole should set the audit committee’s terms of reference after
full discussion, but we would support that the audit committee recommend the choice of
the audit firm, approve their terms of engagement, and fees, and monitor and review their
performance. The audit committee should also keep under review the provision and
extent of non-audit services by the audit firm to the company. Companies, which do not
have a separate internal audit function, should review the need for one at least annually.
This should also fall within the remit of the audit committee. Nevertheless we believe that
these matters should be dealt with by national codes not at EU level.
2.7.1. Composition
We believe that this is best left to national codes.
2.7.2. Role
We believe that this is best left to national codes.
2.7.3. Operation
We believe that this is best left to national codes. We do not believe that a
recommendation on NEDs should refer to offshore centres or SPVs.
2.7.4. Transparency
We believe that this is best left to national codes.
We disagree that the audit committee should report on its disagreements with the
board in the annual report. This would undermine the concept of the unitary board
and of collective responsibility. If the members of the audit committee have serious
reservations about the board’s decisions, they should resign and explain their
reasons in a private letter to the board.
The CBI agrees that the non-executive directors must stand up to the executive to
protect the interests of the company, but the sanction which the NED can apply at the
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end of the day is to resign. When a NED resigns before his term is completed, he
should give a reason by way of letter to the chairman copied to the rest of the board.
The letter should be circulated at the next board meeting and properly minuted.
Letters of resignation should not, however, be made public, since the issue may be
one of differences of personality rather than of serious reservations with board
strategy. But these are not matters which should form part of an EU recommendation.
While the above response may appear very negative, we would emphasize that we do not
disagree with many of the proposals as such. Our belief, however, is that these are not
matters which should be dealt with at EU level.
We would be happy to answer questions on any of these issues. Please contact Susannah
Haan in the first instance.
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