Press releases 2003

10 April 2003

 Exchange calls for Higgs’ proposals to be translated into principles, not rules

In its response to the Higgs Review into corporate governance, the London Stock Exchange today called for Higgs’ proposals to be translated into principles rather than rules.

Don Cruickshank, Chairman at the London Stock Exchange, said: "Since the Higgs Review was published, many views have been expressed by both companies and investor groups.  Many have been characterised or even caricatured as being ‘against Higgs’.  We are for Higgs, but for Higgs to be translated into a Revised Code in a different way."

The Exchange called on the Financial Reporting Council, which is assessing responses to the Higgs Review, to preserve the UK’s ‘principles-based’ approach. It warned that the proposed move towards a prescriptive ‘rules-based’ approach would lead to ‘box-ticking’.

Mr Cruickshank said: “The level of prescription and aggregation of rules – we move from 13 to 43 - may take corporate governance standards in an unwelcome direction. An increased number of rules would cement the box-ticking approach we are starting to experience in the UK. There is a danger that long sets of rules create a mindset of ‘anything is allowed as long as it is not precluded’.”

The Exchange said that relying on principles forces boards and individual directors to form opinions with regard to the particular circumstances of a case, with proper justification of conclusions.  The Exchange believes that a properly created and enforced principles-based approach is tougher to comply with and more effective than ‘hard rules’.

The response recommended restructuring the Directors section of the Revised Code so that it consists only of principles, and that the rules are incorporated in an annex titled “Guidance on the interpretation of Code Principles”. It agreed that a ‘comply or explain’ approach should continue for enforcing the Revised Code.

The Exchange also took the opportunity to welcome the Higgs Review’s increased focus on communication between companies and institutional shareholders, and made recommendations on how this could be progressed.

The Exchange added that the effective date for the Revised Code should be 1 January 2004 as opposed to 1 July 2003. This would allow sufficient time for consultation and for it to become clearer how the Code will fit with other pieces of UK and European legislation that are currently in the pipeline.

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A full copy of the Exchange’s response and Mr Cruickshank’s speech are available to download in Word format.

Notes to editors:

The Exchange’s recommendations were made in its formal response to the Higgs Review, which was submitted to the Financial Reporting Council today.

Mr Cruickshank was speaking at the Investor Relations Society Annual Conference at the Royal Lancaster Hotel in London. Mr Cruickshank is President of the Investor Relations Society and Chairman of the London Stock Exchange.

The Exchange also welcomed the proposed extensions of the Revised Code under the heading Audit and Accountability.