FRC calls for more powers in response to corporate governance consultation

In response to the UK government’s green paper and consultation on potential corporate governance reforms, the Financial Reporting Council (FRC) has called for stronger enforcement powers, reinvigorated reporting duties, more focus on executive remuneration and expanding current governance principles to large private firms. The FRC’s response to its government’s consultation follows last week’s announcement that the regulator will fundamentally review the UK Corporate Governance Code. In December, the UK’s Department for Business, Energy & Industrial Strategy (BEIS) unveiled a green paper and launched a consultation on ways to improve corporate governance. It is considering extending the UK Corporate Governance Code, which currently covers public firms, to large privately owned companies. The government also wants to tackle excessive executive pay and strengthen the connection between boards and their employees. In response to the consultation, the FRC said that demands on the UK’s corporate governance framework are growing and more needs to be done to “win back public trust”. It told government that reform is need in four areas. The first is more effective enforcement of corporate governance laws. According to the FRC, the current regulatory framework is “fragmented” with “gaps in enforcement action”. The FRC proposes extending its powers to investigate and prosecute all directors for financial reporting breaches and associated issues of integrity, rather than only accountants and actuaries. The FRC also argues that the duty on companies to report on a wide range of issues must be “reinvigorated”. “The Companies Act places a duty on directors of all companies to promote the success of the company, and in so doing have regard to a range of other factors, such as long-term consequences, the environment, employees, suppliers and customers. This duty must be reinvigorated. Companies should be required to report more effectively on how they have discharged it,” said the FRC. Extending corporate governance principles to large private firms is the third recommendation from the FRC. It believes that large, private companies must be more accountable to their stakeholders given their significance to the public interest and the privilege and benefits of limited liability status. “The FRC supports the introduction of corporate governance principles for such companies and associated reporting. The FRC is well placed to develop this,” the regulator said. The final area of focus in the FRC’s response tackles executive remuneration. It argues that the role and remit of the remuneration committee should be extended to cover pay policies throughout the organisation. “Remuneration policy and payments should have a much clearer link to delivery of strategy, focusing strategy and outcomes which deliver long-term company performance,” said the FRC. The FRC announced last week that it will "fundamentally” review its country’s Corporate Governance Code. The review will consider issues raised by the UK government’s green paper and consultation on corporate governance standards, as well as work carried out by the FRC on corporate culture and succession planning. Sir Win Bischoff, chairman of the FRC, said: “The Prime Minister has a vision of an economy that, in her words, ‘works for everyone’. This needs UK businesses to thrive so that all stakeholders including workers, customers, suppliers and society itself benefit through job 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 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 added. Mr Bischoff also stressed that any changes to the regulatory frameworks and Corporate Governance Code will be done “carefully and through full consultation” with a wide range of stakeholders.

FRC calls for more powers in response to corporate governance consultation

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