Governance

On 1 September 2023, the Institute responded to the Financial Reporting Council (FRC) invitation for comments on their proposed changes to the “UK Corporate Governance Code” (‘Code’)*.  The proposed changes arise from a UK government request of the FRC to strengthen the UK Corporate Governance Code in specific areas following the recommendations arising from UK White Paper on “Restoring Trust in Audit and Corporate Governance” (‘White Paper’) published in 2022. Some of the key changes proposed to the Principles and Provisions applying to boards include: Setting out a revised framework of prudent and effective risk management and internal controls to provide a stronger basis for reporting on, and evidencing their effectiveness. Improving the quality of comply-or-explain reporting, taking account of recently published FRC research and reports, e.g. reducing boilerplate wording and requiring reports to demonstrate the outcomes of governance activities. Revising the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company's audit and assurance policy. Aligning governance and reporting practices with changes to legal and regulatory requirements as set out in the Government's response to the White Paper, including strengthening reporting on malus and clawback arrangements. The Institute response welcomes FRC proposals that: discourage boilerplate reporting and encourage clear and concise disclosure on the reasons for any departure from the Code’s provisions, and how the Board has otherwise adhered to the overall principles of the Code. encourage consideration of and reporting (in accordance with established sustainability reporting standards) all material sustainability and ESG matters, including climate ambitions and transition planning, in defining business purpose, strategy, and values. increase the emphasis on workforce and broader stakeholder engagement, strengthening diversity and inclusion, and improves the effectiveness of remuneration policies and transparency. respond to some of the Chartered Governance Institute recommendations on board performance reviews and emphasis on improving board effectiveness. engage with emerging risks and opportunities such as artificial intelligence, for which the Institute have provided, in our response, some detailed considerations for inclusion in FRC guidance. Some of the key points highlighted in the Institute’s response focused on: The missed opportunity from limiting the update of the Code to reacting to legislative proposals rather than addressing learnings from corporate governance in recent years, including the principles and values (including ethics and healthy culture) that were lacking in respect of high-profile corporate failures. Highlighting the increasing role and responsibilities of Audit Committees, and the risks arising by mandating them as default for additional requirements versus ensuring the ability of the Board, who are ultimately responsible, to delegate roles and responsibilities as it sees fit in accordance with fiduciary duties. The lack of guidance and definitions for key terms used in the principles and provisions which, if provided, would provide for better understanding, and promote greater consistency, in many areas of the Code, including directors declarations on risk management and internal controls, audit and assurance policies, and narrative reporting. The importance of maintaining the principle-based approach to corporate governance that the Code has championed for over thirty years and to avoid deferring to requirements which are prescriptive, a matter of law and are not suited to a comply or explain model. The risk that established and effective practices for stakeholder engagement, reporting on future prospects and delegating oversight of sustainability matters may be lost based on the way some of the proposals are set out. The Chartered Accountants Ireland response to the FRC addressed all 26 questions and is available here. The FRC proposals are available on their website here. Níall Fitzgerald, Head of Ethics and Governance, Chartered Accountants Ireland   * The Code applies to premium listed companies on the London Stock Exchange and companies with a primary listing on the Irish Stock Exchange (and the Irish Corporate Governance Annex). Other organisations can voluntarily adopt the Code, for example, Chartered Accountants Ireland applies principles of the Code where they are relevant and commensurate to the Institute as a membership body.  

First published in Accountancy Ireland on 02 June 2023 Chartered Accountants Ireland welcomes the timely publication by the Central Bank of Ireland (CBI) of the Individual Accountability Framework (IAF) draft regulations and guidance, and the certainty of action required for Irish financial services firms, writes Níall Fitzgerald. The framework contains measures, including conduct standards and prescribed responsibilities, designed to enhance customer-focused cultures and embed responsibility and ethical behaviour across financial services in Ireland.    While it promotes the necessity for cultural change, the CBI agrees that more is required to achieve this. Insights from the introduction of similar measures in other jurisdictions show that an individual accountability regime better impacts on organisational culture when supported by: Promoting individual accountability but emphasising collective decision making: Being accountable as individuals for actions and behaviour is not new. Professionals are accountable to codes of ethics. There are also many laws and regulations that hold individuals accountable for their roles in an organisation, such as fiduciary duties of directors. However, many organisations thrive on collaboration, teamwork and diversity, which improve collective decision-making. Individual accountability is not designed to override this, and emphasising other positive behaviours, such as these, supports the IAF’s objectives. Promoting a ‘just culture’ and avoiding a ‘blame culture’: A blame culture focuses on identifying culprit/s, penalising them, and moving forward on the assumption that the issue/s won’t happen again because an example has been set. A just culture acknowledges that mistakes and underperformance can occur, but that both are better addressed by reflecting on what went wrong and focusing on what can be learned to improve future outcomes. Individual accountability exists in both scenarios, but the latter will have a more positive impact amongst the workforce, helping achieve the objectives of the IAF. Promoting trust and integrity: Certain informal reactions to a regime such as the Individual Accountability Framework can undermine its objectives. In some jurisdictions individuals with prescribed responsibilities prepare personal compliance files, privately maintained outside of the firm’s documentation system. A ‘cover your actions’ (CYA) approach developed in those jurisdictions, whereby there is a tendency to give advice formally (e.g. in writing), which would differ if given informally (e.g. verbally). Notwithstanding the risk of breaching privacy and confidentiality rules, these informal practices are indicative of low levels of trust and integrity within a firm. Embedding a culture of psychological safety can deter this risk and foster greater trust within the organisation.  Níall Fitzgerald, Head of Ethics and Governance, Chartered Accountants Ireland          

The seventh annual Good Governance Awards concluded on 17 November 2022 with the announcement of the winners across seven categories.  The Awards aim to recognise and encourage good governance standards and reporting in the charity and non-profit sector. It provides tailored feedback and recommendations to all entrants, allowing them to improve governance and reporting across a range of areas such as strategy, performance, and compliance with reporting standards.  The annual report represents a real opportunity for organisations in the charity and non-profit sector to showcase their transparency and trust by disclosing their strategic performance, governance practices, culture and financial results. A good annual report does more than meet minimum reporting requirements. It can provide a comprehensive picture of an organisation, including its achievements and future plans. It serves to reinforce relationships with stakeholders and build further relationships with the public, potential donors, volunteers and supporters. Each of the annual reports entered into the awards undergoes a rigorous assessment process, including a technical compliance review, an assessment of governance practice disclosures and, for those short-listed, a three-stage independent judge review. In the spirit of improving standards, we have compiled a summary of the Judges’ top recommendations arising from their review of this year’s shortlisted annual reports. Top ten recommendations for all organisations Ensure consistency between the non-financial narrative and the financial statements in the annual report, and that they read well as one report telling the story of the organisation. Too often these can appear like separate reports that have been ‘bolted together.’ Emphasise the connection from the organisation’s mission and vision, and how this flows through to its strategy and activities. Provide a summary overview of the background and origins of the organisation – It’s purpose, why it was established and the impact it wishes to make. Disclose key performance indicators (KPIs) that provide insight on the actual performance during the year against the organisation’s targets for that year and previous performance. Targets should clearly define what success for each activity or programme would look like in a given year and at the end of the current strategy. Ensure clarity, accuracy and consistency in the financial reporting and financial summaries which is not only a Financial Reporting Standards requirement but also fundamental to presenting a convincing report. Given the nature of work of charities and non-profit organisations, their sources of income and the level of public and regulatory scrutiny, boards and their advisors should opt-out of preparing reduced disclosure financial statements, an option otherwise permitted by Section 1A of FRS 102, and filing abridged or abbreviated financial statements. Opting for reduced disclosure is sub-standard to good governance practice for a sector that needs to be highly transparent and accountable for continued support. Design the report so it is readable online. Improve readability and impact by using photographs and other graphics to break up the text and visualise the data for readers e.g., graphics that illustrate the sources of funds, programmes expenditure, and KPIs such as the number of people helped. Outline the organisation’s process around board Director/Trustee recruitment, induction, training and board evaluations. Strengthen the profiling of Trustees/Directors. Provide summary biographies on each Trustee/Director, including details on appointment dates, attendance at meetings and whether they were elected, co-opted or how they were selected/recruited. Introduce balance to the report, and make it more realistic, by addressing the areas of frustration, concern or indeed failure encountered during the period rather than only highlighting the areas of success. Top five recommendations for larger organisations in particular In general, reporting on sustainability and climate is limited. A focus on ESG reporting would be an improvement. Consider if too much detail is being provided – some of the annual reports were long and included repeated examples. Highlight how the organisation implements board diversity and succession planning as well as the organisation’s policy on diversity (in its broadest sense). Define how the organisation monitors and mitigate risks. Provide insights into the organisation’s risk appetite and tolerance. Shine a light on future income generating strategies and sources, alongside projected costs, and any new areas of expenditure. For more information, and template annual reports for charities and non-profit organisations, see: Resources – Good Governance Awards. Chartered Accountants Ireland Technical Hub also includes member resources on financial reporting, audit and other regulatory requirements. Róisín McGuigan Carmichael Good Governance Awards Coordinator