Composition and structure of the board – the UK Corporate Governance Code

Out-Law Guide | 01 Mar 2010 | 10:24 am | 2 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated.  It is part of a series on corporate governance . The UK Corporate Governance Code states that: "The board and its...

"The board and its committees should consist of directors with the appropriate balance of skills, experience, independence and knowledge of the company to enable it to discharge its duties and responsibilities effectively" – main principle B.1.

(Note: the Code does not apply to all companies. See: The reach of the UK Corporate Governance Code, an OUT-LAW guide)

The provisions supporting this say that the board should have a ‘strong presence’ of both executive and non-executive directors so that no individual or small group can dominate its decision-taking. At least half the board, not counting the chairman, should be independent non-executive directors.

This means that a board of nine, for example, needs to have at least four independent non-executives to balance four executive directors, with the chairman being the ninth director.

An exception is made for a ‘smaller company’, defined as a company outside the FTSE 350 for the whole of the year before the year being reported on. Those smaller companies are urged to have at least two independent non-executive directors. (Indeed, they will need two if they are to comply with the Code’s requirements for board committees. See: Board committees, an OUT-LAW guide.)

Again, these principles and provisions are for guidance only: a company is free to explain why it believes such numbers of independent non-executives are excessive or not right for its own particular circumstances.

What does all this mean for the structure of the board? Does it effectively create two tiers? The Code is keen to stress that it still believes in the unitary board. The non-executives are not meant to comprise a separate supervisory body on, for example, the German model. Executive and non-executive, independent and chairman are all members of the single decision-making board at the heart of a UK company.

The senior independent director

The board should choose one of its independent non-executive directors to be the senior independent director. The ‘SID’ acts as an alternative point of contact for major shareholders who may have made little headway in discussions with the chairman, chief executive or finance director – or who may have concerns about the performance of such individuals. SIDs serve as a sounding board for the chairman and act as an intermediary for the other directors. The senior independent director also takes the lead in annual appraisals of the chairman.

The post caused some controversy when first proposed in 2003. It was argued that shareholders would be confused: should they talk to the chairman or the senior independent? And was there not a risk that, if they talked to both, different messages would be given – or a different spin given to the same facts? Also, chairmen saw the senior independents as muscling in on their patch. In practice, however, the role has kept a low profile and few problems have arisen. One exception occurred in the midst of the Marks & Spencer argument over Sir Stuart Rose’s dual role as chairman and chief executive, when the SID let it be known that he was interested in taking on the chairman’s job himself (see the case study on Marks & Spencer in our OUT-LAW guide, The role of the board, chairman and non-executive directors under the UK Corporate Governance Code).