The FRC’s annual review of the UK Corporate Governance Code is a reminder for UK businesses that the regulator’s strong commitment to honouring the true spirit of corporate governance shouldn’t be underestimated.The recent report criticises listed companies for adopting a “box-ticking” approach to compliance and calls for a much stronger focus on effectively measuring and reporting progress on goals such as improving stakeholder engagement, building a healthy corporate culture, and promoting diversity.
In the words of FRC's Chief Executive, Sir Jon Thompson:
“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”
For us this shot across the bows raises four questions:
Will this spur boards into action?
The FRC makes it clear that there will be increased scrutiny in the future on leadership’s role in ensuring and demonstrating the positive impact of their businesses on the economy and wider society. However, is the sad truth that, until the regulator shows its teeth, we’re not likely to move beyond honouring the letter and not the spirit of the Code?
Does the replacement of the FRC by ARGA mean that issues outlined by this year’s Corporate Governance Code will drop off the horizon?
Our view is that ARGA (the Audit, Reporting, and Governance Authority) will retain a strong focus on corporate sustainability and reinforce the regulation set out by the FRC. The newly expanded regulator’s broader scope and improved enforcement resources might mean that there is increasing incentive for boards to action the recommendations outlined by this year’s Code of Governance sooner rather than later. In addition, the wider role of auditors themselves creates another impetus for boards to focus on these challenging issues.
Will the UK government be tempted to reduce the focus on corporate sustainability to make the UK as attractive as possible post-Brexit?
Given the government’s appetite for reducing the “burden of legislation”, it’s not unreasonable to ask whether the legal focus on corporate sustainability will be reduced in the future. Our long-term view is that even if the government decides to cut down legislation, increasing pressure from consumers and investors is likely to continue to drive organisations to invest in long-term sustainability issues — perhaps even faster than the FRC or other regulators ever could.
Are boards equipped to action the change the FRC wants to see?
The FRC’s assessment reveals that there is insufficient consideration of the importance of culture and stakeholder engagement and the value those can bring to a business. At the same time, the regulator expects companies to explain how they are measuring and assessing culture. Our recent think tanks on the issue of culture demonstrate that many boards don’t feel they are equipped to effectively measure and assess something as intangible.
We hear from many in our community of Chairs that the real challenge is not their willingness to change but knowing how to achieve that change. Improving stakeholder engagement, defining a clear purpose, and shaping effective culture are some of the most complex tasks any business can face and are also projects that take a long time to bring fruit.
At a time when boards are increasingly overwhelmed by pressure to deliver short-term success and respond to changing and increasingly demanding regulation, it’s understandable that long-term projects such as culture and stakeholder engagement get pushed to the margins. However, UK businesses will have to catch up quickly if they are to face the increasing pressure from consumers and investors, meet the demands of regulation and keep their reputation as the world leaders in corporate governance.