Higgs Report

Higgs Report: In-Depth View

The Higgs Report, formally known as the “Review of the Role and Effectiveness of Non-Executive Directors,” was an influential report published in 2003. Chaired by Sir Derek Higgs, the report was commissioned to evaluate how non-executive directors (NEDs) function within corporate boards and to recommend improvements for their role and effectiveness. The Higgs Report was released concurrently with the Smith Report, which focused on audit committees.

Key Findings and Recommendations

Role Clarification: The report emphasized the importance of NEDs having a clear understanding of their role within the board. It outlined their responsibilities in monitoring executive management, contributing to strategic decision-making, and ensuring accountability and transparency.
Independence: One of the core recommendations was that at least half of the board, excluding the chairman, should comprise independent NEDs to ensure objectivity and prevent conflicts of interest.
Selection and Terminology: The Higgs Report recommended rigorous selection processes for NEDs, ensuring diversity in skill set and experience. It also proposed term limits to prevent entrenchment and encourage fresh perspectives.
Training and Evaluation: The importance of regular training and evaluation for NEDs was highlighted to ensure that they remain competent and effective in their roles.
Committees: The report underscored the need for properly structured committees, particularly audit, remuneration, and nomination committees, with appropriate NED representation.

Impact on Corporate Governance

The Higgs Report, along with the Smith Report, led to significant revisions in the Corporate Governance Code (formerly known as the Combined Code), which set out best practices for listed companies. The revised code adopted many of the recommendations, aiming to enhance the effectiveness of NEDs and overall board functionality.

Examples of Application

FTSE 350 Companies: Many top UK companies adopted the Higgs Report’s recommendation to have at least half of their boards as independent NEDs, enhancing their governance structures.
Executive Compensation: Changes in how remuneration committees function, as influenced by the Higgs Report, led to more transparency and fairness in executive compensation.

Frequently Asked Questions (FAQs)

Q1: What was the primary purpose of the Higgs Report? A1: The primary purpose of the Higgs Report was to review and improve the role and effectiveness of non-executive directors in corporate governance.

Q2: How did the Higgs Report influence the Corporate Governance Code? A2: The Higgs Report influenced the Corporate Governance Code by recommending practices that were subsequently integrated into the code, improving board independence and effectiveness.

Q3: Why is board independence important in corporate governance? A3: Board independence is critical to ensure objective oversight, prevent conflicts of interest, and enhance the credibility and accountability of the board’s decisions.

Q4: What recommendations did the Higgs Report make about the selection of non-executive directors? A4: The Higgs Report recommended a rigorous selection process, ensuring diversity in skills and experience, and implementing term limits for NEDs.

Non-Executive Director (NED): Board members who do not engage in the daily management of the company but play a role in oversight and governance.
Smith Report: A report focusing on audit committees, emphasizing the importance of oversight in financial reporting and internal controls.
Corporate Governance Code: A set of principles and best practices aimed at improving corporate governance for listed companies.

Online Resources

Suggested Books for Further Studies

“Corporate Governance: Principles, Policies, and Practices” by Bob Tricker
“The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members” by Richard Leblanc
“Corporate Governance: Theory and Practice” by John R. Boatright

Higgs Report Fundamentals Quiz

### Who chaired the Higgs Report? - [x] Sir Derek Higgs - [ ] Sir Richard Branson - [ ] Dame Jane Goodall - [ ] Lord Alan Sugar > **Explanation:** The Higgs Report was chaired by Sir Derek Higgs and it focused on reviewing the roles and effectiveness of non-executive directors. ### What year was the Higgs Report published? - [ ] 2000 - [ ] 2001 - [ ] 2002 - [x] 2003 > **Explanation:** The Higgs Report was published in 2003, alongside the Smith Report, focusing on the role of non-executive directors and audit committees. ### According to the Higgs Report, what percentage of a board should be independent NEDs? - [ ] 25% - [x] 50% - [ ] 75% - [ ] 100% > **Explanation:** The Higgs Report recommended that at least 50% of the board, excluding the chairman, should comprise independent non-executive directors. ### Which report was published alongside the Higgs Report? - [ ] The Greenbury Report - [x] The Smith Report - [ ] The Cadbury Report - [ ] The Turnbull Report > **Explanation:** The Higgs Report was published alongside the Smith Report, which focused specifically on audit committees. ### What key aspect did the Higgs Report emphasize for NEDs to improve their effectiveness? - [ ] Higher compensation - [x] Regular training and evaluation - [ ] Limited participation in meetings - [ ] Full time employment > **Explanation:** The Higgs Report emphasized the importance of regular training and evaluation to ensure that non-executive directors remain competent and effective. ### What was one of the primary roles of non-executive directors according to the Higgs Report? - [x] Monitoring executive management - [ ] Conducting daily operations - [ ] Auditing financial statements - [ ] Managing HR policies > **Explanation:** One primary role of non-executive directors, as outlined in the Higgs Report, is to monitor executive management and provide independent oversight. ### Why was independence a major recommendation in the Higgs Report? - [ ] To reduce costs - [ ] To speed up decision-making - [x] To ensure objectivity and prevent conflicts of interest - [ ] To improve public relations > **Explanation:** Independence was emphasized to ensure that non-executive directors can provide objective oversight and prevent any potential conflicts of interest. ### What does NED stand for in corporate governance? - [ ] New Executive Director - [ ] Nominal Executive Director - [x] Non-Executive Director - [ ] Network Executive Director > **Explanation:** In corporate governance, NED stands for Non-Executive Director, a board member not involved in daily management but instrumental in governance. ### How did the revised Corporate Governance Code change after the Higgs Report? - [ ] Introduced stricter financial reporting standards - [x] Adopted recommendations improving NED effectiveness - [ ] Reduced the number of board meetings - [ ] Eliminated audit committees > **Explanation:** The revised Corporate Governance Code adopted many of the Higgs Report's recommendations aimed at improving the effectiveness of non-executive directors. ### What is the function of an audit committee as per the Smith Report? - [ ] Managing day-to-day operations - [ ] Marketing and sales oversight - [x] Overseeing financial reporting and internal controls - [ ] Human resources management > **Explanation:** The Smith Report focused on audit committees, emphasizing their role in overseeing financial reporting and ensuring robust internal controls.

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