New UK corporate governance code provides impetus for risk managers in the digital age, say IRM & Airmic

Although the new UK Corporate Governance Code delivers bigger changes elsewhere, its risk updates were welcomed by the Institute of Risk Management (IRM) and Airmic, that believe the new version will provide greater impetus for members and help manage risk in the digital age. The UK recently published its new Corporate Governance Code with updates focused on ensuring boards develop the right culture, listen to their workforce, are more diverse and companies get a grip on executive pay. Section 4 – which specifically deals with audit, risk and internal control – was updated in 2014 and 2016 and so saw little change, but there are additional references to, and greater focus on, risk in the wider code. “We have retained most of Section 4 including duplication with the Listing Rules (LRs) and DTRs (Disclosure Guidance and Transparency Rules) and reintroduced some elements which were missing from the current code. We have included some additional references to risk and emerging risks in the new code, and the guidance discusses risk in more detail than the version consulted on. Section 1 now includes wording in principle C relating to risk management,” explained the Financial Reporting Council (FRC) regulator, which produced the document. Principle C in Section 1 of the code on board leadership and company purpose reads: “The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.” The IRM told Commercial Risk Europe it is pleased to see greater focus on risk in the new code. “This includes an explicit mention in Section 1 on board leadership and company purpose as recommended in the response IRM submitted to the FRC earlier in 2018,” said the institute’s chairman Socrates Coudounaris. “Section 1 states that the board should establish a framework of prudent and effective controls, which enable risk to be assessed and managed. The provisions further state that companies should describe in their annual report how opportunities and risk to the future successes of the business have been considered and addressed,” he added. According to Mr Coudounaris, the new Corporate Governance Code adds “greater impetus for all risk management professionals to take a leading role working with companies that follow the code in addressing both current risks, emerging risks and opportunities”. Airmic’s deputy CEO, Julia Graham, believes the emphasis on emerging risks, alongside principal risks and the need for procedures and triggers to elevate risks quickly to the board, are an important addition to the code. They were points made by Airmic in its submission during the code’s consultation stage earlier this year, she told CRE. Ms Graham and Airmic believe the new code is important to help companies succeed in the modern business world. “We feel that enhancements to the code principles and associated provisions and guidance are fundamental to managing risk in the digital age, with risks driven by technological transformation and new forms of working,” she said. When publishing the code, the FRC made clear it has not included specific reference to risk committees. Its accompanying guidance on board effectiveness explains that risk issues can be dealt with by a risk committee but, unless legally required, said this a decision for the board. The FRC went on to note that it and other regulators are currently investigating the collapse of construction firm Carillion, which could prompt a rethink of the 2018 Corporate Governance Code’s risk section following further consultation. “In light of these investigations, should there be a need to propose amendments to this section of the new code, the LRs, or other legislation, a further consultation will be undertaken,” said the FRC. The specific audit, risk and internal control principles in the new code are: The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements The board should present a fair, balanced and understandable assessment of the company’s position and prospects The board should establish procedures to manage risk, oversee the internal control framework and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives. The FRC makes some new recommendations about the production of viability statements in the guidance that accompanies the new code. It encourages companies to develop their viability statements in two stages. First, by considering and reporting on their longer-term prospects, taking into account the company’s current position and principal risks. Second, by stating whether they have a reasonable expectation that the company will be able to continue to operate and meet its liabilities during the period of the viability assessment, drawing attention to any qualifications or assumptions as necessary. The 2018 Corporate Governance Code is “shorter” and “sharper” than previous versions, with fewer provisions, said the FRC. It explained a revised code was needed to reflect the changing business environment and help UK companies achieve the highest levels of governance. The updated code has a renewed focus on how its underlying principles are applied in practice, continues to operate on a “comply or explain” basis and wants to avoid a tickbox approach to governance. This offers companies flexibility through application of its principles, provisions and supporting guidance. “It is the responsibility of boards to use this flexibility wisely and of investors and their advisers to assess differing company approaches thoughtfully,” said the FRC. The new code applies to UK-listed companies incorporated in the UK or elsewhere, and to accounting periods beginning on or after 1 January 2019. There are big changes to non-risk specific areas of the 2018 code. It broadens the definition of governance and emphasises the importance of a clear purpose and strategy aligned with healthy corporate culture. It also wants to see positive relationships between companies, shareholders and stakeholders, high-quality board composition with a focus on diversity, and proportionate remuneration that supports long-term success. The new code asks boards to create a culture that aligns company values with strategy and assess how they preserve value over the long term. To help achieve this, the code introduces a new provision stressing the need for greater board engagement with the workforce to understand its views. The code also asks boards to describe how they have considered the interests of stakeholders when performing their duty under section 172 of the 2006 Companies Act. The code says boards should be responsible for workforce policies and practices that reinforce healthy culture. It adds that boards should engage with the workforce through a director appointed from the workforce, a formal workforce advisory panel with a designated non-executive director, other arrangements or a combination of these options. The new code emphasises the need to refresh boards and undertake succession planning to ensure they have the right mix of skills and experience, are constructively challenged and promote diversity. It says boards should consider the length of term that chairs remain in post after nine years at the helm. The FRC has strengthened the role of the nomination committee in succession planning and establishing a diverse board, and identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors, the updated code states. It also stresses that remuneration committees should consider workforce pay and related policies when setting director remuneration. This aims to address public concern over excessive executive pay, explained the FRC. The revised code says that formulaic calculations of performance-related pay should be rejected and that remuneration committees should apply discretion when the resulting outcome is not justified.

New UK corporate governance code provides impetus for risk managers in the digital age, say IRM & Airmic

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