Following the publication of the government's green paper on corporate governance reform, the Financial Reporting Council has announced plans for a "fundamental review" of the UK Corporate Governance Code.
The review will take account of work done by the FRC on corporate culture and succession planning, and the issues raised in the government’s Corporate Governance Reform Green Paper and the BEIS Select Committee inquiry.
In contrast to previous Code reviews, this review takes place against a very different backdrop given recent events at BHS. The FRC’s chairman acknowledged this recently when he said:
"The Prime Minister has a vision of an economy that, in her words, "works for everyone", but needs UK businesses to thrive so that all stakeholders including workers, customers, suppliers and society itself benefit through jobs growth and prosperity. With all this in mind, we will conduct a review of the current UK Corporate Governance Code. This will consider the appropriate balance between the Code’s principles, provisions and guidance."
He also explained that: "In pursuing any changes, the current strengths of UK governance, the unitary board, strong shareholder rights, the role of stewardship and the 'comply or explain' approach, must be preserved we believe. We must not throw out the baby with the bathwater."
Although companies will be reassured by this evolutionary approach, which will build on the established corporate governance framework, they should also prepare for potentially significant changes to that framework. The FRC’s response to the government’s Corporate Governance Reform Green Paper gives a good insight into its current thinking.
The FRC explained that:
- In its view "The regulatory framework is fragmented and enforcement is not fully effective at present... We recommend that the Government establishes a more effective mechanism for holding directors and others in senior positions to account when they fail in their responsibilities."
- "At present the FRC can take action against directors who are auditors, accountants or actuaries, but we cannot take action against other directors even where the evidence suggests they are equally culpable of a breach of regulations. We would be willing to accept additional responsibility to sanction all directors, regardless of their membership of a professional body, when we raise concerns about financial reporting or connected integrity."
- "The FRC stands ready to develop a governance framework for larger private companies. This would need to be tailored to take into account their specific and different ownership and governance arrangements. It should be underpinned by regulation as the Code is with the Listing Rules, recognising that private companies and their shareholders have a close relationship."
Although these are only consultation responses, it is perhaps striking that the FRC is advocating a more effective enforcement mechanism for holding directors to account and is willing to become part of the necessary enforcement machinery. It is a long way from "comply or explain". Does this mean that the FRC will have an enforcement role which covers compliance by directors of quoted companies with their responsibilities under section 172 of the Companies Act 2006 (Duty to promote the success of the company)? This is a potential outcome although the FRC may focus on any new reporting requirements introduced by the government in connection with section 172.
The FRC’s response suggests that those hoping for limited changes to the corporate governance framework are likely to be disappointed. The FRC has made it clear that the governance framework needs to evolve.
How can Burges Salmon help?
We provide specialist corporate advice to businesses on all aspects of corporate governance. If you have any questions on corporate governance reform, and how it may affect your business, please contact Nick Graves.