The regulatory body responsible for overseeing UK corporate governance is to press ahead with significant changes to standards – a move that will impact all firms listed on the London Stock Exchange.
The Financial Report Council (FRC) has set out proposed changes to the nation’s Corporate Governance Code – the part of UK company law that lists specific principles of good corporate governance. It operates on a “comply or explain” basis – meaning those subject to it either need to follow its standards or communicate in full why they haven’t.
It is to see a revamp that will place more emphasis on the importance of good reporting and safeguarding the interests of stakeholders attached to all listed organisations.
The FRC says its an opportunity
“These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting,” said the FRC’s CEO Sir Jon Thompson.
“While we await Government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve and enhance the UK’s audit and corporate governance framework and lay the groundwork for the creation of ARGA [Audit, Reporting, and Governance Authority – the agency intended to replace the FRC in 2023, as part of a wider overhaul].”
What are the changes, and who will they affect?
Ultimately, legislation has been promised by the British government that is meant to refine corporate governance, audit, and reporting standards. However, this is still in the development phase, so instead of waiting, the FRC is pushing ahead with whatever changes it does not need legislation to make.
These primarily focus on expanding duties in:
- Internal controls
- The responsibilities of boards towards an expanded commitment to ESG – where they fit in the movement and how they can contribute.
- Updates from directors on potential fraud – this has been highlighted as a necessity following several high-profile cases that saw collapses at prominent British companies, including retailer BHS and building company Carillon.
Both boards and senior management within public UK firms should pay close attention to these changes, particularly when they are fleshed out in the next two years.
They will, however, benefit from updated guidance that will be issued once the revised code is finalised. Several guidance documents for those in corporate governance are already in existence, and the FRC will ensure these are changed to reflect future standards, ultimately offering a reliable go-to for anyone who needs it.
Overall, the reaction has been positive, albeit with a continuing request for more information.
The FRC paper has been praised for offering clarity amid a busy period of change – clarity that the British government alone hasn’t been able to bring.
“The FRC’s ambition to simplify and improve reports and accounts is especially welcome. Annual reports are the cornerstone of company reporting,” Guy Rainbird, public affairs director at the Association of Investment Companies, told IPE.
“Making these clearer, with information valued by shareholders, will help to build shareholders’ trust in auditing and corporate governance, thereby maintaining the integrity of markets.”
CEO of the Institute for Chartered Accountants in England and Wales echoed those sentiments, saying that while the process of change would be complex, the overall effort was “vital”.
However, the Association for Chartered Certified Accountants has warned that more clarity was needed on finer details before the proposals could receive its full approval.
“In many cases, the devil will be in the detail, and more of that detail will be required so that we know what is planned and when,” its director of policy and insights told AccountancyAge.
“The government somehow needs to provide certainty of the legislative timetable to give effect to the setting up of ARGA. This will provide the regulator with the statutory basis that it needs to set it up for success.”
The FRC intends for its updated code to apply, in full, from 1st January 2024. A consultation period will take place in the meantime.