The Financial Reporting Council's (FRC) changes to the UK Corporate Governance Code have been met with caution by the industry, with claims that it fosters short-termism.

The change to the Code, formerly known as the Combined Code, that has come most under fire is a move towards annual elections for all FTSE 350 directors. This, the FRC said, will increase accountability.

UK pension fund, the Universities Superannuation Scheme (USS), is concerned that the proposals could engender a short-term outlook, particularly dangerous at a time when shareholders and directors should be looking longer-term.

"Shareholders in UK companies already have the requisite tools to hold directors to account as they have the rights and means to remove a director from the board even if that individual is not standing for re-election in that year," explained Daniel Summerfield, co-head of responsible investment at USS. "The move towards annual elections therefore appears to be a solution to a problem that does not exist."

Paul Lee, director of Hermes Equity Ownership Services, added that the group also opposes this change to the Code. "We oppose this move because we do not believe it is necessary in the UK context of significant shareholder rights, and we consider it to be a move in the wrong direction towards shorter-termism. We believe that most UK pension schemes oppose the switch to annual elections because of similar concerns. It seems odd that in the context of a crisis driven by too much focus on the short-term, the most obvious change to the Code is to shorten the tenure of directors and potentially shorten the time-horizons over which they look."

Lee added that while this approach may work in some markets because shareholder rights are so limited, this is not the case in the UK. "It is possible to have access to boards to seek change, and in extreme cases it is possible to add resolutions to AGM agendas or even to call EGMs to express a view."

Other changes include requiring a company's business model to be explained, with the board responsible for determining the nature and extent of the risks it is willing to take; aligning performance-related pay to the long-term interests of the company, its risk policy and systems; and to promote debate in the boardroom.

Boards are also encouraged to be well balanced and avoid 'group think', with the need to appoint members on merit; and help enhance their performance and awareness of its strengths and weaknesses. The chairman of the board should also hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.

The UK Corporate Governance Code sets out standards of governance for listed companies.

The new edition of the Code will apply to financial years beginning on or after 29 June 2010.

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