FRC code aims for integrity

The Financial Reporting Council (FRC) published an updated UK Corporate Governance Code in July, which it says puts the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy.

Updates to the code touch on issues around workforce and stakeholder engagement, corporate culture, improving diversity and succession planning for boards, and public concern over executive pay.

“The new code considers economic and social issues and will help to guide the long-term success of UK businesses,” said Sir Win Bischoff, chairman of the FRC. “This new code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”

This emphasis on building trust is also backed by the government’s business secretary Greg Clark, who said: “These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run.”

The main changes in the code

The updated code includes a new provision to enable greater board engagement with the workforce to understand their views, and asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act.

It also calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy, promotes integrity and values diversity.

Improving diversity is also picked up in the new advice for boards to ensure they have the right mix of skills, experience and constructive challenge. The code emphasises the need to refresh boards, undertake succession planning and consider the length of term that chairs remain in post beyond nine years. To support this agenda, the code has strengthened the role of nomination committees in succession planning and establishing a diverse board.

The need for external evaluation of all company boards has also been identified, with a requirement that nomination committee reports include details of the contact the external board evaluator has had with the board and individual directors.

To address public concern over executive pay, the new code emphasises that workforce remuneration and related policies are taken into account when setting director remuneration. Formulaic calculations of performance-related pay should be rejected, and remuneration committees should apply discretion when the resulting outcome is not justified.

Board effectiveness

The code is supported by new Guidance on board effectiveness also published by the FRC in July, which states that boards need to think deeply about the way in which they carry out their role, because the behaviours that they display, both individually as directors and collectively as the board, set the tone from the top. It also emphasises an existing principle that boards need to take account of risk in order to make good decisions.

The guidance includes a section on audit, risk and internal control which risk managers should find useful in ensuring that risk management is high on the board agenda. It states that regular risk assessments and reviews of the risk management systems including information on ‘close calls’ and ‘near misses’ will help the board determine whether the systems in place are robust enough to deal with a wide range of risks. Suggested questions for companies to consider include whether they have adequate internal controls over risk, and whether there are clear procedures and triggers in place to elevate risks to the board quickly.

The guidance also recommends that boards ask themselves a number of questions about how future challenges and opportunities are being identified and addressed, what proportion of board time is spent on financial performance management versus other matters of strategic importance, and how they assess and measure the impact of decisions on financial performance, the value for shareholders and the impact on key stakeholders.

Reactions to the new code

The Economia news website from the Institute of Chartered Accountants in England and Wales gathered a number of reactions to the new code, including a comment from Roger Barker, head of corporate governance at the Institute of Directors, who welcomed the report but also said that “by removing reference to the professional development of directors from the code and only mentioning it peripherally in the guidance, the FRC risks indicating to directors that it is not important.”

Commenting on the aspect of workforce engagement, Frances O’Grady, TUC general secretary, said: “While it’s good this new code recognises the importance of workforce engagement, the real test is whether companies give workers more of a say in how they are run.”

As the guidance states, ultimately, it is for individual boards to decide on the governance arrangements most appropriate to their company’s circumstances, applying the principles of the code and following good practice set out in the code provisions and guidance. The FRC hopes that, by encouraging a broader focus and a willingness to listen to different voices and influences, the updated code will support openness and accountability in delivering the long-term sustainable success.

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