Unlocking the Code: What do the changes mean for you?

The UK Corporate Governance Code, in effect from 29^th June this year, replaced the previous Combined Code. It applies to all companies with a premium listing on the London Stock Exchange regardless of where the company is incorporated. Over the next few blogs, I’ll look at some of the major changes contained in the latest revision and what they might mean, practically, for any particular company, starting with:

Diversity on the Board

The new Code makes explicit for the first time the need for gender equality, and diversity generally, to be taken into account in hiring decisions. Provision B.2 Supporting Principle states:

The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.

Responses to this addition have been plentiful and various. Regardless of whether you believe this advice should or should not have appeared in the Code, the fact remains that, at present, only 10% of directors in Britain’s top 100 companies are women, and 25 of these top firms have no women board members at all: shareholders and other readers of the Code are going to ask questions of under representative boards.

Because the new requirement is phrased as a principle, not a provision, companies will not be forced to explain publicly the absence of women directors. This is not tantamount to a get-out or loophole; instead, it means that companies have the time to work on building a diverse board membership. There is no pressure to appoint new directors purely for their contribution to gender or ethnic diversity (as the IOD pessimistically predicts: http://www.continuitycentral.com/news05179.html).

Boards skewed towards the white, British male should take action now to amend their nomination committees’ processes. Descriptions of the role and capabilities required for a particular appointment should be carefully prepared, open advertising employed and/or an external search consultancy engaged in the recruitment process. If these behaviours become established and well-used, diversity will be a natural outcome. Take care of your nomination procedures and board diversity will take care of itself.