Businesses are pleased with the new rules

The Financial Reporting Council (FRC) has drawn up a new code of corporate governance, but pleased industry bodies by opting for a lighter approach than some had feared.

"This is a victory for common sense," said Digby Jones, head of the Confederation of British Industry (CBI).

The new rules will be governed by a "comply or explain" policy, rather than the previously feared "comply or else" - the new approach will allow companies to explain any departure from the code in their annual report, rather than having to comply under the threat of sanction.

"The FRC has delivered a code that will encourage better corporate governance but not have damaging unintended consequences," added Mr Jones.

The CBI had published a survey in March suggesting 80% of chairman at Britain's top 100 companies felt the original proposals would make it difficult for them to run their boards efficiently.

Restoring confidence

The new code, drawn up by the former investment banker Derek Higgs, is intended to restore investor confidence following the recent string of corporate scandals such as Enron and Worldcom, and tales of boardroom excesses.

The measures include:

• A rule barring chief executives also holding chairmanship, and preventing a chief executive from going on to become the chairman of the same firm.

• A strengthening of a company's audit committee to ensure the integrity of company accounts.

• Non-executive directors will be able to serve companies for up to nine years, rather than six.

• The number of independent directors on any board of smaller listed companies should be two, rather than half the board as previously suggested.

'Golden hello' strategy

Derek Higgs' original proposals were widely criticised, with many business groups condemning them as overly prescriptive and impractical.

But business leaders now welcomed the revised proposals.

"The code has the potential to make Britain's boardrooms work better," said TUC chairman Brendan Barber.

"It is now up to businesses to turn good words into good practise."

The code comes into effect for company reporting years from November, so will effect most firms from next year.

The change is intended to address the perception that guaranteed bonuses are used to disguise 'golden hellos' as part of executives' normal remuneration.