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.
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