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

Continuing the thread on the changes contained in the revised UK Corporate Governance Code, this post will look at the implications of Section B.7:

Re-election

The previous 2008 version of the Code provided that directors should seek re-election at least every three years. It was following overwhelming support from institutional investors, who felt it would promote better engagement with shareholders, that the new Code now recommends the annual re-election of all directors of FTSE 350 companies.

The change is significant for most Boards; only a few listed companies already voluntarily re-elected directors annually. The IOD, among others, has expressed concern that the new provision encourages short-term thinking and creates the potential to destabilise the Board (http://press.iod.com/2010/05/28/iod-reaction-to-uk-corporate-governance-code-revision/).

It should be noted that, on past indications, the failure to re-elect directors is rare. The effect of the requirement, therefore, is largely to tilt the power balance towards investors as directors coming up for re-election could feel subtle pressure to engage, or at least to appear to engage, more with investors.

FTSE 350 companies should consider the exposure which may be created by the new recommendation for annual re-election of directors. For example, if an executive director is not re-elected this may trigger immediate termination provisions under his or her service agreement which may not necessarily work in the company’s best interests. This would have a serious impact on the continuity of the company’s business which, in the current market, could be very detrimental.