Two decades have passed since the publication of the Cadbury Report which outlined a system for good corporate governance that still endures today. While business practice has evolved considerably over the last twenty years, with more than half of the FTSE 350 now complying with the UK Corporate Governance Code, challenges remain and practices continue to evolve.

1. C O R P O R AT E G O V E R N A N C E R E V I E W 2 0 1 2
The chemistry of governance
A catalyst for change

2. 2012 highlights
Full compliance plateau with 51% New UK Corporate Governance Average tenure of auditor is
choosing to fully comply and Code provisions on annual re- 33 years with three out of four
44% of the 144 companies who election and triennial external companies giving little or no
did not comply planning to do so board evaluations had immediate information about past or
next year. effect, with 96% and 98%, future intentions.
respectively, complying in the
73% (2011: 69%) of companies first year. 25% of chairmen give no insight
gave detailed reasons to support into board governance practices.
non-compliance but two thirds Increasing numbers of non-
of those who did not comply in financial companies, 40% (2011: Emerging practice shows 5% of
consecutive years made no change 33%), have a risk committee. chairmen now emphasising the
to their explanations. importance of culture as integral
85% (2011: 74%) of companies to effective governance.
Almost one in five FTSE 350 gave detailed disclosures to
companies had insufficient support their principal risks and Annual reports continue to
numbers of non-executive uncertainties, but 21% hardly expand – 16.5% over three years.
directors throughout year to changed year on year. 73% (2011: 62%) of companies
comply with the UK Corporate now actively seek governance
Governance Code. Business model expositions are
improving 39% (2011: 27%) but dialogue with investors.
for three out of four companies,
linking strategy to risk and KPIs
is proving more challenging.
Methodology
This review covers the annual reports of 296 of the UK’s FTSE 350 companies with years ending
between June 2011 and April 2012. Investment trusts are excluded as they are permitted to follow
the AIC Code of Corporate Governance.
The review assesses compliance with:
• the disclosure requirements of the UK Corporate Governance Code Simon Lowe would like to thank Collette Brady,
• the requirements for a business review as set out in s417 of the Companies Act 2006. Sajeel Joshi, Ben Langford, Ololade Oyatoye,
Sajni Radia, Rebecca Williams and Alex Worters
Key findings are discussed in the body of this report with full details in the appendix.
for their help in preparing this report.

3. Contents
The regulator’s perspective 2
Foreword 3
The Cadbury legacy 6
Compliance with the Code 8
Leadership 12
– The role of the board
– The chairman
Effectiveness 15
– Board composition
– Board appointments
– Evaluation
– Re-election
Accountability 22
– Risk management and internal control
– Audit committees
Assurance 25
– External audit
– Internal audit
Remuneration 28
Shareholder relations 31
Narrative reporting 32
– Financial and business reporting
– Principal risks
– Key performance indicators
Recent developments 36
Appendix 40
CORPORATE GOVERNANCE REVIEW 2012
2011 1

4. The regulator’s perspective
The task of embedding high standards of
governance is never complete
Peter Montagnon, Senior Investment Adviser, Financial Reporting Council
The European Commission’s decision to This year’s successes include progress It seems like a long list, but the starting
affirm the role of comply or explain is on boardroom diversification, achieved point is positive. The UK still has high
both a relief and a challenge. It is a relief without formal quotas, and the widespread rates of compliance and few explanations.
because the UK Corporate Governance take-up of annual re-election of directors, It is right that the option to explain should
Code can still play an important role in which has improved accountability. always be open, but those that choose
raising standards of governance. It is a Looking forward, we have to work on this route must be aware that self-serving
challenge because the Commission has accounting and audit, risk and reporting and weak explanations from a very small
made clear that the concept could be of business models, not to mention the minority let the whole side down.
made to work better. perennial problem of remuneration. On the
stewardship front, the quality of dialogue
No doubt its remarks are aimed mostly is improving but we still need to do more
at member states where codes are less to engage asset owners and persuade
effective because of weak explanations investment decision-makers and corporate
and monitoring. Yet the task of embedding governance specialists to be more
high standards of governance is joined up.
never complete, even in the UK. The
compendium of essays published by the
FRC to mark the 20th anniversary of the
Cadbury Report shows it is a work in
progress, even here.
2 CORPORATE GOVERNANCE REVIEW 2011

5. Foreword
2012 marks the 20th anniversary of the advent of modern
corporate governance – the publication of the Cadbury Report.
While business practice has evolved significantly since 1992,
much of Sir Adrian Cadbury’s landmark analysis still rings true
today – not least his definition of effective governance:
“Companies … must be free to drive their companies forward, but
exercise that freedom within a framework of effective accountability.
This is the essence of any system of good corporate governance.”
Welcome to Grant Thornton’s Building on Cadbury’s foundations next year. However, it is concerning that
annual analysis of the The Cadbury committee laid the two thirds of those who have explained
governance practices of the foundations for today’s largely effective in consecutive years have not changed
system of UK governance and provided their explanations.
UK’s FTSE 350 companies.
the guiding principles for many other 2012 marked the introduction of
national codes. Two decades after additional Code requirements. The
Simon Lowe, Chairman,
Cadbury, this year’s review of current review shows businesses moved swiftly
The Grant Thornton Governance Institute
corporate governance practice shows in response: provisions on annual
how far we have come – and how far director re-election and triennial
we still need to go. external board evaluations saw 96%
This year, just over half (51%) of and 98%, respectively, complying in
all FTSE 350 companies complied the first year.
with the UK Corporate Governance
Code (the Code) – the latest distillation Chairmen espouse ethical leadership
of Cadbury’s voluntary code of best We have identified an emerging practice
practice. A further 10% of companies among chairmen: one in 20 now
complied for part of the year. emphasise the importance of company
The level of full compliance appears culture to effective governance.
to have plateaued at around the halfway Although too early to call this a trend,
mark: this year’s 51% ratio is 1% up on the role of culture and ethical principles
2011 and the same as 2010. There are in cementing effective governance
mixed messages around those companies is gaining credence. This is seen, for
who opt to explain. Encouragingly, they example, in statements by Sir David
tend to comply in all but one or two Walker, Barclays’ new chairman, as
provisions, with an increasing number, he endeavours to effect fundamental
73% (2011: 63%), giving more than a changes in the bank’s culture and
basic explanation for non-compliance, thereby governance practice.
and 44% saying they plan to comply
CORPORATE GOVERNANCE REVIEW 2012 3

6. Foreword
Seventy five per cent of chairmen now provide Raising the game
some insights into the governance practices of The governance excellence of the best companies
their boards and a growing number, 23% (2011: encourages others to raise their game. It also
10%), use their principal statements to emphasise highlights the poor performance of the few
the importance of good governance. This suggests – companies that want the rights of access to
chairmen are heeding the Code Preface guidance public capital and market liquidity but shirk
to “report personally in their annual statements the responsibilities that come with it. That
how the principles relating to the role and said, compliance in itself is no proof of strong
effectiveness of the board have been applied”. governance. As Cadbury acknowledged:
Many companies still give no clear pointers “The Code is only a framework: compliance alone
to their strategic vision: just one in five linked does not constitute good governance or effective
strategy to risks and key performance indicators board behaviour. The spirit… is as significant as
(KPIs). While the disclosure of risks again the letter”.
increased, many companies repeated previous
years’ almost verbatim rather than reflecting the Values integral to governance
dynamic discussions at boardroom tables. To deliver effective governance, compliance must
be underscored by an ethical tone from the top
Reports grow ever longer – manifested in strong board leadership and the
“To deliver effective governance, The seemingly inexorable establishment – and embedding – of clear values.
compliance must be underscored by trend of providing more, This was recognised by Cadbury 20 years ago
an ethical tone from the top.” but not necessarily better, and it remains the case today. As the US separates
information continued. chairmen and chief executive roles and UK boards
While a handful of companies slimmed down their acknowledge the importance of ethical leadership,
reports, for the third consecutive year the average the chairman’s part in achieving an effective
length grew by almost 4%, to 141 pages. This is governance culture has never been so important.
an increase of a mind-numbing 16.5% since 2009. This year, externally-facilitated board
The Department for Business, Innovation and effectiveness reviews were embraced by around
Skills (BIS) may be asking companies for greater 30% of companies, with 102 board assessments.
transparency but, in providing it, the wood may Yet companies remain shy about sharing the
be getting lost amongst the trees. output, focus or even the name of the facilitators
Two decades after Cadbury called for the of their reviews: just 35% gave a good account
separation of the roles of chairmen and chief of review outcomes, up from 24%. The Financial
executive, 10 FTSE 350 companies still have Reporting Council (FRC), intent on improving
combined posts and a further 21 have executive board effectiveness, clearly believes these reviews
chairmen. This pales in comparison with the US, can get better. From next year, all companies will
where more than 57% of S&P 500 companies have have to identify their facilitators.
combined roles. Yet, the US too is now showing
disquiet over joint roles, with recent high profile
separations at JC Penney, Avon and Citigroup.
4 CORPORATE GOVERNANCE REVIEW 2012

7. Foreword
Institutions must foster better practice The enduring glass ceiling
The ‘shareholder spring’ saw institutional Finally, although somewhat overshadowed by “It is now
shareholders finding their voice, most notably the gender issue, our review charts the continuing time for
about executive pay and board elections. Once diversity challenge. With little measureable shareholders to
again, Cadbury had articulated this need: “It is for information about diversity on boards, gender act to encourage
the shareholders to call the directors to book if and age provide useful yardsticks. After recent best practice
they appear to be failing in their stewardship and high profile resignations, the gender debate is now across UK plc.”
while they cannot be involved in the direction and turning to the heart of the board: the executive
management of their company, they can insist on a role. Here we find only one female chairman in
high standard of corporate governance”. the FTSE 100 and two in the Mid 250. Twenty
The number of companies actively seeking one women are in executive positions but only
engagement with investors increased to 73% (2011: two female chief executives remain. The average
62%). However, anecdotal information suggests age of a company chairman, at 63, is 11 years
the institutions are more reticent to engage, more experienced than a chief executive. With the
certainly on matters of governance, claiming lack effectiveness of the board being very much the
of resource and/or sufficient existing engagement responsibility of the chairman and using age as
with the executive team. If strong governance is a a proxy for experience and gender as part of the
proxy for long-term success, this balance needs to answer to diversity, can we afford to wait for over
be addressed urgently. 10 years before we start to see women set the tone
from the top?
A focus on quality
It is now time for shareholders to act to
‘encourage’ best practice across UK plc. If they
do not ‘call the directors to book’ the regulators
may do it for them and, in so doing, threaten
the ‘comply or explain’ cornerstone of UK
corporate governance. While deliberations at the
European Commission seem to have backed off
from wholesale abandonment of the principles-
based approach, greater emphasis is being placed
on the quality of explanations and shareholder
engagement. The FRC’s strengthening of the
Stewardship Code and the Kay Review on ‘UK
equity markets and long-term decision making’,
suggest that neither regulators nor the public will
wait another 20 years for best practice to take hold.
CORPORATE GOVERNANCE REVIEW 2012 5

8. The Cadbury legacy
The 1992 Cadbury Report The Cadbury Report – or ‘The Report
of the Committee on the Financial
“It has not stopped companies
continues to shape corporate
Aspects of Corporate Governance’ failing, but nor has it been so
governance frameworks prescriptive it has prevented
– fits firmly into the Anglo-Saxon
around the world, with its core them succeeding.”
corporate tradition of favouring checks
‘comply or explain’ principle
and balances to regulation. Although
still exciting debate. The UK Government’s 2010
its interim report was condemned by
response, the Stewardship Code,
some as divisive, the final toned-
brought the role of shareholders into
down recommendations, including
the spotlight, while being tentative
the voluntary code of best practice,
in some areas. In its December 2012
were widely welcomed.
Action Plan, the EC seemed to accept
From the first, however, there was
‘comply or explain’ but turned up
some scepticism about the effectiveness
the heat on the need for informative
of a purely voluntary code. Sir Adrian
explanations. The Stewardship
Cadbury argued that it was up to
Code’s 2012 revisions picked up on
shareholders, as company owners, to
this and the FRC, while cautious
exert the necessary pressure toward
about getting sucked into a policing
compliance. And, if companies did not
role, is considering how further
comply “it is probable that legislation
oversight could encourage continued
and external regulation will be sought”.
improvement.
In its on-going review of corporate
While debate around oversight
governance practices, the European
continues, Cadbury’s legacy is in
Commission focused on the very
no doubt. As Sir Adrian explained
two areas that Cadbury flagged up:
20 years ago, it has not stopped
shareholder engagement in pressuring
companies failing, but nor has it been
companies to be accountable and the
so prescriptive it has prevented them
effectiveness of the ‘comply or explain’
succeeding. In this vein, since 1992 it
principle in achieving transparency
has helped restore battered reputations
and accountability.
and investor confidence in company
management, following notorious
corporate scandals in the 80s and 90s,
“The report helped restore battered from BCCI to Maxwell. But most
reputations and investor confidence notably, the report has effected a quiet
in company management, revolution in global governance, with
following notorious scandals more than 80 countries now having
in the 80s and 90s.” introduced corporate governance codes.
6 CORPORATE GOVERNANCE REVIEW 2012

9. 1992 1995 1998 1999 2003
Cadbury GREENBURY HAMPEL TURNBULL Higgs
Report Report Report Report report
In response to UK In response to public Reviewed To clarify reporting on In response to US
governance failures anger over executive implementation of internal control corporate failures such
such as Polly Peck, pay such as the British Cadbury and Greenbury • Requirement for the as Enron, Worldcom
BCCI and Maxwell Gas ‘fat cats’ • Combined Code on board to review the and Tyco
• Separation of chairman • Requirement for corporate governance system of internal • Last major Code
and chief executive roles remuneration committee issued control and risk revisions
• Requirement for two of NEDs • A focus on principles management • Backed the ‘comply or
independent NEDs • Long-term performance as opposed to detailed explain’ principle (as
• Requirement for audit related pay introduced guidelines opposed to US approach
committee of NEDs of regulation through the
Sarbanes-Oxley Act)
• Requirement for at
least half of board to be
independent NEDs
• Introduced annual board
and director evaluation
2005 & 2008 – Code revisions
2010 – Code revision
2012 – Code revision
2003 2009 2010 2011 2012
Smith Walker Stewardship FRC’s Guidance FRC’s
report review Code on Board guidance on
Effectiveness explanations
In response to Reviewed governance of Intended to enhance the Replacement for 2003 Report of discussions
concerns over auditor the UK banking industry quality of engagement Higgs guidance between companies
independence in response to the global between institutional • Provides guidance on and investors
• Provides guidance on financial crisis investors and companies sections A and B of the • Provides guidance on
role and responsibilities • Number of Code around leadership quality of explanations
of audit committees recommendations and board effectiveness
• Focus on independence incorporated into
of external auditors the renamed 2010
and level of non-audit UK Corporate
services provided Governance Code
CORPORATE GOVERNANCE REVIEW 2012 7

10. Compliance with the Code
As half of the FTSE 350 comply entirely with the Code and, overall, companies embrace 97%
of its provisions, UK plc is increasingly embracing good corporate governance.
FTSE 350 companies choosing to ‘comply or explain’
100%
7%
16% 12% 16% 14%
16% 16%
20%
26%
80% 34% 25%
24% 36% 35%
36% 34%
60% 37%
37%
18%
37%
40%
40%
58%
47% 51% 50% 51%
20% 46% 44%
41%
34%
28%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Does not discuss compliance Does not comply, explains with ‘more’ detail
Does not comply, explains with ‘some’ detail Complies
For the third successive year, around Compliance with provisions Explanation quality
half (51%) of all FTSE 350 companies Although 49% of companies report The Code states that: “an alternative
claimed full compliance with the non-compliance with the Code, this to following a provision may be
UK Code. As this was the first year typically relates to just one or two justified… if good governance can be
companies were required to report provisions. Taking these together with achieved by other means. A condition
against the new provisions of the those who cite full compliance, the of doing so is that the reasons for
2010 Code, the fact that levels stayed FTSE 350 complies with 97% of the it should be explained clearly and
consistent – whereas previously they Code’s provisions. carefully to shareholders”.
have dropped initially – suggests The number of companies providing
businesses are now more prepared to Number of Code Number of more informative explanations continues
embrace compliance. provisions stated companies to improve, with 72% of those that
in non-compliance
Compliance levels in the FTSE 100 chose not to comply providing detailed
statements
remain around 10% higher than in the reasoning. Of these, 14 gave particularly
1 85
Mid 250. While compliance appears to clear, informative explanations that
2 29
have plateaued, encouragingly 44% of covered the background and reasons for
3 11
the 144 companies that did not comply, their decisions.
4 7
state they are planning to do so. It will
5 7
be interesting to see if the 2013 results
reflect this ambition. >5 5
TOTAL 144
8 CORPORATE GOVERNANCE REVIEW 2012

11. FTSE 100 and Mid 250 companies choosing While an encouraging trend, of the
to ‘comply or explain’
73 companies that did not comply in
100% consecutive years, two thirds made
no changes to their explanations.
90% There also remain a hard core of
40 companies that still give a bare
minimum of explanation.
80%
on the FTSE 350:
“[A good description] should set
70% out the background, provide a The varied complexion
clear rationale for the action it is of the FTSE reinforces
how, when it comes to
60% taking and describe any mitigating governance, ‘one size
actions taken. The explanation cannot fit all’:
50% should indicate whether the • The three largest
deviation from the Code’s FTSE 100 companies
40%
provisions is limited in time and, have a higher market
if so, when the company intends capitalisation than the
to return to conformity with the whole Mid 250
30%
2008 2009 2010 2011 2012 Code’s provisions.” • Market capitalisation
(UK Corporate Governance Code) of FTSE 350
FTSE 100: Complies companies ranges
Mid 250: Complies In February 2012, the FRC paper from £330 million
FTSE 100: Explains in ‘more’ detail ‘What constitutes an explanation to £100 billion
Mid 250: Explains in ‘more’ detail
under “comply or explain”?’ identified • FTSE 350
features of a meaningful explanation, a membership is fluid:
summary of which is included within only half of the current
“Compliance levels in the list were members a
the 2012 Code revision. The FRC said
FTSE 100 remain around 10% the most informative explanations decade ago
higher than in the Mid 250.” include: areas of non-compliance; • The top 20 companies
reasons for deviation from the Code; are larger than the
planned actions to overcome non- rest of the FTSE 350
compliance, and whether the company combined
intended to comply in future. • The largest FTSE
350 has more than
650,000 staff, the
smallest just 14
CORPORATE GOVERNANCE REVIEW 2012 9

12. Compliance with the Code
Challenges to full compliance
The most common non-compliance relates to board balance and committee membership.
Only 14 companies failed to comply with the new Code provision for annual director
re-election and, of these, almost half committed to introduce it within 12 months.
Most common non-compliance from FTSE 350 companies (2012)
18.6%
Insufficient
independent directors
on the board
11.1%
Failure to meet
remuneration committee
membership criteria 10.8%
Failure to meet
audit committee
membership criteria
6.4% 6.4%
Failure to meet Non-independent
nomination committee chairman appointed
membership criteria in the year**
5.1%
Role of chairman
and chief executive
combined
“Encouragingly, 44% of the 144 companies
that did not comply, state they are planning
4.7%
to do so.”
Directors not subject
to annual re-election*
* This Code provision first became effective this year.
**Of the 19 companies that reported non-compliance, 10 did not appoint
their chairmen during the year and were not, therefore, required to report
against this provision.
10 CORPORATE GOVERNANCE REVIEW 2012

13. Compliance with the Code
Emerging trends Moving beyond compliance
There has been a notable improvement
Do committee chairs introduce
their reports? (Yes %)
Governance insight in the quality and presentation of board
“Chairmen are encouraged governance disclosures within annual
to report personally in their
annual statements how the
reports, with many companies going
beyond mere statements of compliance.
50%
Remuneration
principles relating to the role and As explored in our report ‘The tone committee
effectiveness of the board (in of governance’1, more chairmen are
Sections A and B of the new Code) establishing their personal governance 23%
15%
have been applied.” credentials. However, there is a Audit committee
disparity between chairmen who used
(UK Corporate Governance Code, Preface) Nominations
their primary statement to give this committee
insight and those who left it to the
To what extent are the features of
board governance discussed in the
corporate governance statement: the
chairman’s primary statement? latter can suggest compliance box- Remuneration committee chairmen,
ticking. perhaps spurred on by the intense and
In all, three quarters of chairmen widespread interest in executive reward,
23% 10% referred to governance in their
primary statements or the corporate
are increasingly putting their names
to their reports, with more personal
2012 2011 governance report. More than half accounts of committee activities. Such
(58%) emphasised its importance ‘by-lining’ is also growing among
Yes, detailed commentary through their primary statement. On chairmen of audit and nomination
closer scrutiny, the majority kept committees but, at 23% and 15%
respectively, at a slower rate.
35% 33%
their explanations to a minimum but
23% (2011: 10%) of chairmen truly Indeed, personal accountability
2012 2011 embraced the Code’s Preface and used is one of this year’s emerging trends:
their primary statement to enable seen in both the personalising of sub-
Yes, basic commentary valuable insight into board practices. In committee reports and in company
contrast, 25% of chairmen still give no chairmen taking responsibility
insight into board governance practices. for governance and values. As
42% 57% shareholders and regulators demand
more information and sub-committees
2012 2011 Increasing personal ownership
The improvement in disclosures around receive increased guidance on how and
board committee activity is another what they should report to boards, this
No
notable trend. An increasing number of pattern is likely to continue. Whether
company reports now include personal this will lead to sub-committee
overviews from committee chairs on chairmen reporting at AGMs remains
the key issues and priorities for the to be seen but the momentum towards
following year. greater accountability is clear.
1
Governance insights: The tone of governance,
Grant Thornton, October 2012.
CORPORATE GOVERNANCE REVIEW 2012 11

14. Leadership
Recent corporate scandals have heightened the need for
a strong and principled tone from the top. Chairmen, along
with the two other members of the ‘governance holy trinity’ –
CEOs and company secretaries – have a crucial role to play.
The role of the board How much detail is provided on how
the board operates and discharges
With mounting scrutiny of the
leadership and operation of boards, it is
its duties? (More/outstanding %)
“The board should set the encouraging to see increasing coverage
company’s values and standards of the way they work.
and ensure that its obligations to
its shareholders and others are
64% Meeting frequency
2012
understood and met.” The Code does not advise on the
(UK Corporate Governance Code,
53 % frequency of board and committee
supporting principle A.1)
There is increasing emphasis on
2011 76% meetings, merely specifying that “the
board should meet sufficiently regularly
2012 to discharge its duties effectively”.
the way boards carry out their role,
This year, the average number of
71%
the behaviours they display and the
board meetings was 8.5, with a range of
culture they promote. This message
was reinforced in the 2011 FRC 57 %
2011 between two and 25. (When Cadbury
published his report, 20 years ago,
Guidance on Board Effectiveness: 2012
the average number was six.) Helpful
“An effective board develops and
promotes its collective vision of 42% disclosures explained both how many
meetings were originally planned
the company’s purpose, its culture, 2011 and the number of, and reasons for,
its values and the behaviours it unscheduled meetings.
wishes to promote in conducting
its business.” Average number of board and committee meetings
(FRC Guidance on Board Effectiveness, 10
1.2) 9
8 8.5 8.5
8.4
7
6
5
5.0 5.1
4 4.6
4.4 4.4
4.1
3 3.5
2 2.8
2.5
1
0
Board Audit Remuneration Nomination
Committee Committee Committee
FTSE 350 FTSE 100 Mid 250
12 CORPORATE GOVERNANCE REVIEW 2012

15. The chairman As we argue in ‘The tone of
governance’1, the regulator could help
“The chairman is responsible convert such exceptional practice into
for leadership of the board and the norm: “As the external investors’
ensuring its effectiveness on all primary representative inside the
aspects of its role.” boardroom, the chairman has a crucial
(UK Corporate Governance Code, main role in standard setting and embedding
principle A.3) the tone. Perhaps now is the time for
the FRC to pick up on this emerging
“The chairman should promote a
practice of the few and expand its
culture of openness and debate.”
Preface to the Code to encourage the
(UK Corporate Governance Code,
many to recognise the importance
supporting principle A.3)
of values in establishing the right
The chairman has a crucial role in governance culture in an organisation”.
establishing a positive company culture. However, even the most determined
Corporate scandals, from Barclays’ chairman cannot steer a company in the
Libor-fixing to RBS and Olympus, right direction alone. A growing pre-
are potent reminders of what can go requisite to success is the governance
wrong when leaders fail to instil a ‘holy trinity’ of the CEO, chairman
principled tone from the top. And this and company secretary. This was
tone should not just be demonstrated recognised by the FRC in its 2010
in the chairman’s statement and the Board Effectiveness guidance, where
boardroom but in all actions within it increased the emphasis on the
and outside the company – including importance of company secretaries
interaction with shareholders. in supporting chairmen on
In a positive emerging practice, governance issues.
a small number of chairmen are now
taking overt responsibility for setting “Executive chairmen are typically
the right tone. This year, 5% embraced former CEOs or founding
A.1 of the Code, reinforced by the shareholders, a background
FRC Guidance on Board Effectiveness that can lead to them retaining
1.2, and firmly turned the spotlight on significant influence on the board.”
the importance of culture and values
in underpinning effective governance
practice.
1
Governance insights: The tone of governance, Grant Thornton, October 2012.
CORPORATE GOVERNANCE REVIEW 2012 13

16. Leadership
Independence of chairmen Drilling down into detail: 10 UK
During the year, 39 companies companies had a joint chairman and
appointed a new chairman. Of these, chief executive, with another seven
20 disclosed they were independent combining the roles at some point
on appointment (a Code requirement) during the year. In a further 21, the
and eight reported they were not roles of chairman and CEO were
independent and so non-compliant. not combined, but the chairman held
on Chairmen: The remaining 11 failed to state whether executive powers and was actively
• Four chairman head
the new chairman was independent, involved in running the business. While
three FTSE 350 in breach of the Code. this is not a technical breach, it strains
boards, 24 chair two the spirit of the Code.
• There are 31 Division of responsibilities Executive chairmen are typically
executive chairmen in “There should be a clear division former CEOs or founding shareholders:
the FTSE 350 of responsibilities at the head of a background that can lead to them
• One in four FTSE the company between the running retaining significant influence on the
chairs have sat on the of the board and the executive board. In several cases, a review of the
board for more than responsibility for the running of division of responsibilities suggests the
nine years and six for the company’s business.” chairman is CEO in all but name.
over 25 years When assessing whether a board
(UK Corporate Governance Code, main
• The average FTSE principle A.2) meets the Code’s independence
350 chairman is 11 requirements, the chairman is excluded,
years older than the One of the most significant changes
whether or not they hold executive
executive to come out of the Code, in marked
responsibilities. For boards with
contrast to the traditional US model,
• 78% of chairman in executive chairmen, a board with equal
the FTSE 100 have is the separation of the role of chairman
numbers of executive and non-executive
held executive roles and chief executive. Although more
directors will be deemed in compliance
previously, 42% as than 10% of UK companies still
with the Code, despite the fact that the
chief executive either combine the roles or blur
executive team forms a majority with
• There are only three the responsibilities, in the US it
the executive chairman holding the
female chairs in the remains the case for 57% of S&P
casting vote – an apparent anomaly and
FTSE 350 500 companies.
one that several shareholder groups are
presently seeking to address.
“There is increasing emphasis on the way boards carry
out their role, the behaviours they display
and the culture they promote.”
14 CORPORATE GOVERNANCE REVIEW 2012

17. Effectiveness
As companies face pressure to Board effectiveness
achieve a diverse boardroom Populating boards is proving a growing
spread, female directors challenge, particularly outside the
FTSE 100 where approximately 22%
remain under-represented
of companies failed to either maintain
across the FTSE 350. or achieve the required balance of
independent non-executive directors
Board composition
at some time in the year. As the natural on Board numbers:
“The board and its committees cycle of retirement is planned, this
should have the appropriate • Almost one in five
suggests that unplanned retirements (18.6%) of FTSE 350
balance of skills, experience, are on the increase or it is taking longer boards had too few
independence and knowledge of to find the right candidates. Either independent NEDs
the company to enable them to way, sourcing independent NEDs and • All companies had
discharge their respective duties addressing the growing demand for at least two non-
and responsibilities effectively.” greater diversity should be moving up executives, with one
(UK Corporate Governance Code, main the agenda of chairmen and nomination having 14
principle B.1)
committees. • Three boards had no
Increasing non-executive presence Of the 55 companies without executive directors
Boards seem to have reached their sufficient independent members, a third • Four FTSE 100
‘natural size’ with the average FTSE (18) were compliant for part of the year. companies had 16
350 board having 5.5 non-executive directors
directors (NEDs) (2011: 5.3), a • The average FTSE
chairman and three executive directors 100 board had
(as last year). 11 members, the
average Mid 250
board had 8.4
FTSE rank Number of Insufficient Independent NEDs
companies independent NED on board (average) • The smallest board,
in group membership with four directors,
1–100 99 12% 6.7 is in the Mid 250
101–200 91 22% 5.1 • Around 15% of
201–350 106 22% 3.9 directors have
TOTAL 296 18.6 5.2
multiple FTSE 350
directorships
“Chairs of nomination committees may wish to work with their company
chairmen to identify potential candidates from inside and outside the
business, to meet long term needs.”
CORPORATE GOVERNANCE REVIEW 2012 15

18. Effectiveness
A question of independence The most frequently given reason for non-compliance
Across the FTSE 350, 83 non-executive directors (5%) (see page 41) relates to insufficient numbers of NEDs.
were not considered independent. Of these, 27 represented This – along with pressure to address the gender imbalance,
significant shareholders and 39 were recent employees or particularly among executive board members – is likely to
board members of more than nine years’ standing. push succession up the institutional agenda. In anticipation,
chairs of nomination committees may wish to work with their
FTSE 350 FTSE 100 Mid 250 company chairmen to identify potential candidates, from
Total number of NEDs 1,629 692 937 inside and outside the business, to meet long term needs.
Number of NEDs who 83 25 58 John Kay’s July 2012 review, ‘UK equity markets and
were not independent long-term decision making’ recommends that companies
% non-independent NEDs 5% 4% 6% consult major shareholders around key board appointments
such as chairmen and important non-executive appointments.
A further 39 NEDs were considered independent by the While this is not mentioned in the Code, it is another point
board despite not meeting the independence criteria set out in that nomination committee chairs may wish to consider.
provision B.1.1 of the Code. Of these, the majority (30) had
served on the board for more than nine years. Diversity
“The search for board candidates should be
Board appointments conducted, and appointments made, on merit, against
“There should be a formal, rigorous and transparent objective criteria and with due regard for the benefits
procedure for the appointment of new directors to of diversity on the board, including gender.”
the board.” (UK Corporate Governance Code, supporting principle B.2)
(UK Corporate Governance Code, main principle B.2)
The Davies Report on Women on Boards focused attention
With the growing focus on the need for greater diversity, on the lack of female directors – and the need to rectify this
coupled with the apparent shortage of candidates, imbalance. Lord Davies’ recommendation that 25% of board
nomination committees are coming under increased scrutiny members should be female by 2015 has prompted action.
from shareholders. Encouragingly, the number of recent female appointments,
Despite this, nomination committee disclosures were at least among non-executives, has increased significantly.
relatively poor with more than half of all companies, 55%, However, Mid 250 female representation still lags the FTSE
(2011: 63%) providing only basic information. This is often 100 by some margin. While many companies are confident
limited to a commentary on appointments with little or no of achieving the 25% target, it raises a fundamental issue
discussion around board composition, succession planning or around the short-to-medium term availability of female
desirable characteristics. executive talent. With the recent high profile departures of
There is a noticeable difference between the largest Anglo American’s Cynthia Carroll, WH Smith’s Kate Swann,
companies in the FTSE 100, where 62% (2011: 59%) provide and Pearson’s Dame Marjorie Scardino, female executive
informative disclosures, and the Mid 250 where only 37% representation is at risk of, at best, remaining static.
(2011: 26%) gave similar detail.
Most companies have a long way to go to provide
meaningful disclosures in this area, although there are signs
of improvement. That only 15% of nomination committee
chairmen contributed a commentary to their report suggests
that the drive has to come from the chairs themselves.
16 CORPORATE GOVERNANCE REVIEW 2012

19. Effectiveness
Gender diversity (% director positions held by women) Female representation in the boardroom has grown to 10.8%
2012 FTSE 350 FTSE 100 Mid 250 (2011: 9.8%) with a marked penetration among the FTSE 100
Chairman 1.0
NEDs, where 21% of positions (2011: 18.2%) are held by
1.0 women.
1.0 The number of female executive directors remains low
Executive 5.1 at 5.1% (2011: 4.9%) and has taken a step backwards in the
Director 6.8 Mid 250 at 4.2% (2011: 4.3%).
4.2 Despite 38% of FTSE 100 and 36% of Mid 250 director
NED 14.4 appointments from March 1 to November 15, 2012 being
21.0 female3, a significant number of all-male boards endure. Eight
13.0 FTSE 100 boards and 79 of Mid 250 companies have no
Total 10.8 women around the table. As FTSE 100 directors often ‘cut
16.7 their teeth’ in the Mid 250, the low female representation on
9.8
the latter’s boards suggests FTSE 100 recruitment of women
2011 directors – already challenging – will become even tougher.
As the obvious sources dry up and the experience path for
Chairman 0.7
1.0 executive appointments remains long and intensive, achieving
0.5 greater female representation at the heart of the UK’s largest
Executive 4.9
companies is likely to remain a distant goal.
Director 5.9
“[The annual report] should include a description of
4.3
the board’s policy on diversity, including gender, any
NED 14.4
measurable objectives that it has set for implementing
18.2
11.5 the policy, and progress on achieving the objectives.”
(UK Corporate Governance Code 2012, provision B.2.4)
Total 9.8
13.0
7.7
2010
“Twenty two per cent of companies
Chairman 1.3 failed to maintain/achieve the required
2.0
1.0
balance of independent non-executive
directors at some time in the year.”
Executive 4.4
Director 4.9
4.1
NED 12.9
17.2
9.8
Total 8.8
12.2
6.7
Professional Boards Forum BoardWatch. http://www.boardsforum.co.uk/boardwatch.html
3
CORPORATE GOVERNANCE REVIEW 2012 17

20. Effectiveness
Do companies discuss gender diversity? This year has seen a significant increase in the number of
FTSE 350 companies discussing their approach to gender diversity,
driven largely by the Davies Report. Seventy eight per cent
(2011: 28%) now provide at least a basic outline, with 16%
(2011: 6%) setting out detailed disclosures.
Only 13% of companies (FTSE 100: 23%, Mid 250:
22%
7%) committed to, and disclosed, a target for female
16% 62 % representation in the boardrooms by 2015, with a handful
setting more ambitious goals than 25%. In our experience,
disclosure practices take four to five years to evolve, so for
Yes, detailed disclosure Yes, some discussion No 84% of the FTSE 350 evolution has some way to go.
FTSE 100
27% on gender diversity:
61 % 12%
• At the time of our review, just 268 of 2,484 FTSE 350
Yes, detailed disclosure Yes, some discussion No directorships were held by women
Mid 250
• 36% of companies had exclusively male boards
(FTSE 100: 13%, Mid 250: 47%,)
• 47 companies met Lord Davies’ 25% criteria (FTSE 100:
25, Mid 250: 22) with three companies having boards
made up of more than 40% women
26%
• More directorships are held by women in the FTSE 100
11% 63%
(147) than the whole Mid 250 (121)
• The number of female executive directors on Mid 250
boards fell to 23 from 25
Yes, detailed disclosure Yes, some discussion No
“While the spotlight on women on boards can only
be positive, attention should not be diverted from the
need to reflect breadth in other areas, including age,
ethnicity, nationality, background, profession and
personality type.”
18 CORPORATE GOVERNANCE REVIEW 2012

21. Effectiveness
A broader definition Experience of the chairman
The average age of a chairman is 63, 4.5 years
of diversity older than a non-executive and 11 years older than
an executive director. Interestingly, 63 is almost
While the spotlight on women on
identical to the average age of a member of the
boards can only be positive, attention
US Senate, perhaps confirming at what point age
should not be diverted from the need to
and experience come together. Where experience
reflect breadth in other areas, including
on Directors’ age is concerned, 78% of FTSE 100 chairs previously
age, ethnicity, nationality, background,
and tenure: held executive main board positions, 43% of them
profession and personality type.
• FTSE 100 executives
as chief executive.
Age and experience have two years more
Average age of directors
experience than in the
Average age Mid 250 25%
FTSE Mid FTSE • Mid 250 chairs have
100 250 350 22.7
been in post for more 20%
21.0
Exec 52.7 50.9 51.5 than 7.5 years on 19.9
Non Exec 59.0 58.6 58.7 average, two years
15%
Chair 63.5 62.5 62.9 longer than in the
FTSE 100 13.2 12.9
10%
Average tenure • NEDs have an average
tenure of 4.5 years,
FTSE Mid FTSE
suggesting nine 5%
100 250 350 5.3
years of full service 1.4
Exec 6.7 6.8 6.8 (in line with the 3.0 0.6
0
Non Exec 4.6 4.5 4.5 Code’s recommended
0
44
49
54
9
4
9
4
5
minimum)
<4
–5
–6
–6
–7
>7
Chair 5.6 7.6 6.9
–
–
–
40
45
50
55
60
65
70
• Eight per cent of
With little information available other NEDs have more than
than the directors’ biographies to nine years’ tenure,
assess diversity among the FTSE, most of whom are
not classified as
age is the only readily available
independent
proxy for experience.
• The average age of
an NED is 59
• The oldest NED is
86, with 12 over 75
and one in six over
retirement age
CORPORATE GOVERNANCE REVIEW 2012 19

22. Effectiveness
Evaluation Is information given about
evaluation findings?
Externally-facilitated board
evaluations
“The board should undertake FTSE 350 FTSE 100 Mid 250 “Evaluation of the board of
a formal and rigorous annual FTSE 350 companies should be
evaluation of its own performance externally facilitated at least every
and that of its committees and three years.”
individual directors.” (UK Corporate Governance Code, B.6.2)
(UK Corporate Governance Code,
The Code provision for FTSE 350
main principle B.6)
44% companies to have externally facilitated
More than half of companies, 52% 35% board evaluations at least triennially
(2011: 37%), provide good descriptions
30%
became effective this year. Evaluations
around their board evaluation process. were undertaken by 102 companies
Encouragingly, a former reticence to (2011: 74), with 40 more announcing
share output from reviews is easing plans to do so next year.
with 35% (2011: 24%) now giving To help improve the quality of
some insight into the findings. 2012 (%)
evaluations, in its 2012 Code revisions,
the FRC introduced a requirement
Level of explanation of board
to name external facilitators. More
evaluations (More description
of process) than two thirds (71) of the 102 that
had been externally evaluated gave
FTSE 350 FTSE 100 Mid 250
this information. Twenty eight
different organisations were used,
52% 24 %
31%
with three being engaged by more
than 10 companies and 18 being
2012
21% involved with just one. Anecdotal
37% evidence suggests a wide variation
73%
in review quality and approaches,
2011
ranging from questionnaires and
2012 2011 (%) attendance observations to the use of
psychometrics.
Although the format, focus and
41 % 52% style will continue to be heavily
influenced by the chairman, this greater
2011
2012 transparency will hopefully raise the
bar of expectation among investors,
participants and the consultants
29% themselves.
2011
20 CORPORATE GOVERNANCE REVIEW 2012

23. Effectiveness
Was the board evaluation externally facilitated? Re-election
FTSE 350 FTSE 100 Mid 250 “All directors of FTSE 350
companies should be subject to
annual election by shareholders.”
25 % (UK Corporate Governance Code, B.7.1)
In the first year following the
introduction of this provision, it
35%
2011 was adopted by 96% of FTSE 350
17 %
companies. Twelve suggested that it
discouraged the taking of a long-term
view.
2012
2010 Prior to the 2010 FRC consultation,
only 6% of companies had annual re-
elections. This immediate uptake of
27%
a new provision is a clear example of
the Code’s ability to change practice,
particularly in areas where shareholder
2010 engagement is more evident. With such
a clear impact, the temptation may be
to resort to legislation to drive change
but care must be taken not to dilute
34% or undermine the Code’s founding
principle of comply or explain.
2011
42%
2012
12 % 31%
2012
2010
20%
2011
CORPORATE GOVERNANCE REVIEW 2012 21

24. Accountability
Companies need to give genuine insight into their risk management and control operations,
rather than just ticking the compliance boxes for these crucial areas.
Assessing internal control With a growing focus on risk
Risk management and effectiveness management and both the FRC and
internal control The Turnbull guidance put the spotlight BIS seeking greater transparency,
on both risk management and internal the emphasis needs to move from
“The board is responsible for control. Since then the emphasis acknowledging that the annual internal
determining the nature and extent on these two aspects of governance controls review took place towards
of the significant risks it is willing has gathered momentum. While all revealing actual risk management
to take in achieving its strategic companies now claim full compliance practices and the role internal control
objectives. The board should with Turnbull, many offer little insight plays in mitigating risks. The FRC
maintain sound risk management to readers. Reports tend toward the will be commencing its consultation
and internal control systems.” boilerplate, merely confirming the in early 2013.
(UK Corporate Governance Code, main existence of appropriate systems and
principle C.2) practices. Only one in four companies
The Turnbull report, ‘Internal control: enable real understanding of their
guidance to directors’, was issued in systems and how their boards measure “Thirty three FTSE 350
1999 and revised in 2005. While interim their effectiveness. This figure has companies claimed their small
consultations supported the FRC’s barely altered in five years. size, lack of complexity, and
belief that it was still fit for purpose, the proximity of senior management to
regulator is expected to begin a formal operations precluded the need for
review in 2013. internal audit.”
Good quality disclosures on risk management and internal control
FTSE 350 FTSE 100 Mid 250
66% 74% 78% 87% 59% 68%
2012 2011 2012 2011 2012 2011
Strong internal control disclosures Strong internal control disclosures Strong internal control disclosures
44% 35%
2012 55% 63% 68% 2012 48%
2011 2012 2011 2011
Strong risk management disclosures Strong risk management disclosures Strong risk management disclosures
22 CORPORATE GOVERNANCE REVIEW 2012