FRC announces UK Corporate Governance Code review
The Financial Reporting Council (FRC) will be conducting a comprehensive review of the UK Corporate Governance Code, following news that the British government is keen to shake up big business culture in the country.
According to the FRC, the decision to review current standards of good practice came after its own research into corporate governance and the government’s recently published Green Paper.
The FRC recently established a Stakeholder Advisory Panel comprising various industry experts across multiple sectors, with these representatives and other key groups expected to provide input on the review.
Sir Win Bischoff, FRC chairman, said any potential overhauls of the code must not “throw out the baby with the bathwater”.
“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,” he told attendees at the Institute of Chartered Secretaries and Administrators (ICSA) Future of Governance launch.
Corporate governance becomes key focus
The ICSA will be publishing a series of thought leadership papers as part of the Future of Governance initiative, which aims to highlight the suitability of existing frameworks to handle today’s complex governance issues.
Chris Hodge, policy adviser to the ICSA, claimed there are four key areas where corporate governance guidelines must be strengthened:
- Establish legal sanctions to punish poor business behaviour
- Boost mechanisms that hold listed companies to account
- Drive good governance promotion across all sectors
- Re-evaluate current policy approaches to multiple issues, including income inequality
Mr Hodge argued that the UK Corporate Governance Code has not seen fundamental changes in 25 years, despite huge shifts in the way organisations do business.
“The perceived purpose of governance has gone from being ‘better oversight’ to ‘saving capitalism’,” he commented.
“While the framework is still well suited for its original task, it is not capable of preventing or effectively sanctioning bad behaviour by boards or directors or – on its own – of delivering public policy objectives.”
Industry lauds changes
Experts have welcomed the news that corporate governance will be under the spotlight, with one London Business School (LBS) academic arguing for large-scale change that will turn organisations into “purposeful companies”.
Alex Edmans, professor of finance at LBS, said radical changes are required across numerous areas, such as accounting systems, company law, executive remuneration, shareholder structures and the investment industry.
He helped compile a report in conjunction with The Purposeful Company Task Force, which offered suggestions on how to dramatically improve corporate governance measures. This included:
- The simplification of executive pay, which should be tied to long-term value creation
- New diversity structures and systems
- Written articles of association that outline a company’s purpose
- Ensuring directors report how they are fulfilling their legal obligations to ‘have regard’ for stakeholders
Meanwhile, the FRC intends to begin a consultation regarding potential proposals for change after its review is completed and the results of the government’s Green Paper are published.
Corporate governance is set for major reforms over the next couple of years, which could have a significant impact on the recruitment market across several functions. Stay tuned to learn more about the latest news and developments as they occur.
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