A review of corporate governance is not on the Government’s agenda for this parliamentary session. We explain how the FRC is revisiting the proposed reforms as a result.
The FRC’s aim in suggesting certain reforms of the Corporate Governance Code was to restore trust among investors and the public after the damaging collapse of high-profile businesses such as Carillion, BHS and Thomas Cook. A consultation was launched in May on the proposals. Read more about the consultation here.
But we learnt from the recent King’s Speech that the Government has not prioritised reform of the Code for the next parliament. The FRC has responded by reconsidering its original reforms, so as to focus on what is most important in the immediate term.
It has also taken on board the general consensus from stakeholders that the collective burden the proposed reforms would have created may have outweighed their benefits. It’s also clear, though, that stakeholders believe a degree of reform is absolutely necessary.
In spite of the setback, the FRC is encouraged by the Government’s reassurance in October that it continues to take the reforms seriously and will introduce legislation when parliamentary time allows.
The FRC is focused on improving the quality of audit and corporate reporting and governance, while also supporting the UK’s economic growth and international competitiveness:
“We remain resolutely focused on ensuring our current regulatory tool-kit is used to best effect for this purpose, working closely with stakeholders. This includes setting proportionate standards, fostering a culture of continuous improvement and holding to account those that fall short.”
So in what way has the FRC’s approach changed? As well as stakeholder feedback on the consultation and the Government’s de-prioritisation of the reforms, the FRC has also considered the wider debate about business reporting requirements and burdens across the economy.
As a result, it will only take forward a small number of the original 18 proposals, and will stop development of the others completely.
The main change is a revision to its proposed reform of internal controls. This includes allowing more time for implementation and making sure the UK approach is substantially different from the much more intrusive method adopted in the US.
There will also be a small number of adjustments that reduce duplication associated with the Code, a move which is overwhelmingly supported by stakeholders.
Among the many original proposals the FRC will not be pursuing are those relating to the role of audit committees on environmental and social governance, and modifications to existing provisions on diversity, overboarding, and committee chairs engaging with stakeholders.
Next steps in 2024
The FRC will publish an updated Code in January. This will include an additional remit for its Stakeholder Insight Group to provide the FRC with advice on how to strike the right balance between supporting effective governance, providing proportionate guidance and reducing unnecessary burdens.
If you would like further guidance on the FRC’s update on proposed reforms to corporate governance, please contact Jessica Wills.