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EDITIONS
 Monday, 20 January, 2003, 09:51 GMT
New rules to stop boardroom abuse
Enron building exterior
Enron's collapse was blamed on directors ignoring evidence
A major shake-up is likely in the UK's boardrooms following the publication of an independent review into the role of directors.

The review is not a blue-print for box-tickers, but a counsel of best practice that can be intelligently applied

Derek Higgs
Former investment banker Derek Higgs has recommended that at least half the board directors of any company listed on the stock market should be independent non-executives - people with no day-to-day management role.

He has also said the role of chairman and chief executive should be separated, and urged independent directors to work more closely with major shareholders.

Mr Higgs was asked by the government last year to come up with proposals to prevent the sort of boardroom abuses that led to Enron's collapse from happening in the UK.

'Strongly desirable'

His report challenges the 'old boys network' which, in the past, has allowed senior company figures to appoint friends and colleagues to the board.

Directors who sit on a number of different boards, such as the Royal Mail chairman Allan Leighton, could also be asked to limit their directorships to between three and five posts.

This is to help crack down on 'pluralist' directors who give only minimal attention to each of the companies for which they work.

'Raising the bar'

Mr Higgs said he rejected a legislative approach and instead wanted to build on the existing framework of UK corporate governance.

"Effective boards depend on the best people and on their behaviours and relationships.

The test for government will be the extent to which the business and investment communities rise to the challenge that has been laid down

Chancellor Gordon Brown
"My recommendations reflect this.

"My hope is that, taken together, the recommendations of this review will significantly raise the bar for board practice and corporate performance in the UK."

He added: "I do not presume that a 'one size fits all' approach to governance is appropriate.

"The review is not a blue-print for box-tickers, but a counsel of best practice that can be intelligently applied."

Other proposals include:

  • A more open and fair appointments procedure
  • Better training for directors
  • Annual performance reviews

A report by Sir Robert Smith on the behaviour of audit committees was also published earlier on Monday.

'Widening the pool'

Commenting on the two reports, Chancellor Gordon Brown said: "Stronger and more effective boards are essential to continue to raise standards of corporate governance in the UK.

"Hand in hand with a stronger role for institutional investors recommended in the Myners review, the reforms Derek Higgs and Sir Robert Smith envisage are crucial underpinnings of our ambitions for corporate and economic performance and for productivity.

"The test for government will be the extent to which the business and investment communities rise to the challenge that has been laid down."

Trade and Industry Secretary Patricia Hewitt said she welcomed the "practical steps Derek Higgs proposes to widen the pool of people available to UK boards".

Breaking the rules?

A number of blue-chip companies could be found in breach of the new requirements, including BAA, Dixons and the supermarket group Morrisons.

Morrisons for example may be forced to change its rule of having no non-executive directors, independent or otherwise.

Mr Higgs has spent six months examining the role of non-executive directors and assessing what skills they should bring to the company.

The DTI is also expected to unveil the result of its review into the lessons that can be learnt from the US corporate scandals such as WorldCom and Enron.

Both companies collapsed after directors failed to spot or report corporate mis-management and lost shareholders billions of dollars in investments.

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  Sir Adrian Cadbury
"We acepted that all situations are different."
See also:

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