Non Exec Legislation & Code of Conduct
The US approach to the responsibilities of Directors including Non-Executive Directors contrasts with the UK. The US has introduced legislation whereas the UK has taken a "Code of Conduct" approach which is now called the Corporate Governance Code (used to be called the Combined Code) click here:
and Higgs Report suggestions for Best Practice:
http://www.frc.org.uk/corporate/combinedcode.cfm
Suggestions for good practice from the Higgs Report (118kb)
US Legislation - Sarbanes-Oxley
- In the aftermath of the Enron collapse in the US, President Bush hastily introduced the 2002 legislation which became known as Sarbanes-Oxley.
- The objective of the Sarbanes-Oxley legislation, known as Sarbox was to prevent corporate fraud and protect investors. The legislation placed stringent responsibilities on Corporate Executives or Directors in the US.
- US Regulators now admit that the legislation which is seen as somewhat draconian has damaged Corporate America. Some companies have delisted from American exchanges while many others have spurned the US altogether and the London exchanges have benefited.
UK Code of Conduct
- The UK has taken a different approach to corporate governance and the responsibilities of Directors including Non-Executive Directors with a "Code of Conduct" approach.
- The UK's code based approach was established by the Hampel Review and the Cadbury Committee and subsequently in the Higgs report published in January 2003.
- The Cadbury Committee stressed the corporate governance benefits of a strong Non-Executive representation on a Company's Board.
- The Hampel Review also emphasised the strategic input and benefit of Non-Executives.
- The Higgs report noted that: "Non-Executives are the custodians of the Governance process".
- Higgs referred to the hastily passed US Sarbanes-Oxley legislation and likened their Legislation to the UK legislation to deal with dangerous dogs.
- Higgs recommended the code based approach established by Hampel and Cadbury because "it offers flexibility and intelligent discretion and allows for the valid exception to the sound rule".
- Sir Derek Higgs in his Higgs report made it clear that it was only aimed at listed Companies.
- The Higgs report stated that Non-Executive Directors should not be shareholders but made it clear that this referred only to listed companies and not SMEs where investing is beneficial to align the incoming NED's interest with the existing Directors.
The Non-Executive Director has an important and highly beneficial role to play in Small Medium Enterprises (SMEs) and owner managed companies especially if they are ambitious and have aspirations to grow.