FRC to review UK Corporate Governance Code

Posted by on 08/03/2017

Corporate governance in UK is set to come under wider scrutiny after the country’s accounting watchdog, the Financial Reporting Council (FRC), announced it would conduct a fundamental review of the UK Corporate Governance Code.

Speaking at the launch of ICSA’s work on The Future of Governance in mid-February, FRC chair Sir Win Bischoff said the review would consider the appropriate balance between the code’s principles and provisions. 

‘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 must not throw out the baby with the bathwater,’ he said.

The FRC’s review will take account of work done by the FRC on corporate culture and succession planning as well as issues raised in the Business, Energy and Industrial Strategy Committee inquiry and a government Green Paper aimed at strengthening corporate governance.

The announcement of the full review came a day before submissions closed for the Green Paper. The latter, to which Governance Institute has made a submission, considered three specific aspects of corporate governance where the UK Government believed there was room for improvement: executive pay; strengthening the employee, customer and supplier voice; and governance in the UK’s largest privately-held businesses.

Previously, UK Prime Minister Theresa May had called for employee representation on company boards, but the Green Paper included employee representation as only one of number of possible ways to strengthen the voice of stakeholders at board level in large UK companies.

However, in its submission to the Green Paper, Governance Institute strongly recommended that the issue of employee board representation be left to the discretion of the particular company and board involved and not be mandated.

‘Employees or stakeholders appointed to the board are likely to consider that they have been appointed to represent the interests of employees or the stakeholders who appointed them,’ it said.

The Green Paper also canvases the possibility of increasing shareholder voting rights on executive pay further in the UK and refers Australia’s ‘two-strike’ rule.

After pointing out its pros and cons of this rule from Australia’s experience, Governance Institute did not believe it should be introduced in the UK. It did, however, believe that voting thresholds could be reviewed to facilitate greater shareholder engagement.

The Green Paper also explored whether and to what extent large, privately held businesses should have to meet the formal corporate governance and reporting standards of publicly listed companies.

When it came to protecting shareholders, Governance Institute argued against any further shareholder rights being granted, noting that large, privately-held business frequently have shareholders with big enough holdings to be able to have their views taken into account by boards.

However, it noted that these companies’ disclosures to other stakeholders could often be opaque. Yet, the consequences could be dire. ‘It is possible that some large, privately held businesses can affect the employment rate of one town and therefore stakeholder interests are extremely relevant to these businesses.’

As a result, Governance Institute recommended requiring greater transparency to stakeholders through enhanced reporting. ‘We are of the view that mandatory reporting concerning governance arrangements should be introduced, but that it could be modelled on the UK Corporate Governance Code, whereby large, privately-held businesses are asked to report on a ‘comply or explain’ basis as to their governance arrangements,’ it said.

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