This has been an emotional time for me. Having been ‘editor-in-chief’ of the UK Corporate Governance Code for ten years, I was somewhat sceptical when I was told that the Financial Reporting Council would be consulting on a new, improved version. When every humble comma had been the product of hours of intense debate, and invested with infinite layers of meaning, how could that be possible?
So, having read the revised draft Code that was published this morning, it annoys me intensely to have to report that — if not entirely new — it has undoubtedly been improved.
“Shorter and Sharper”
The draft Code meets the FRC’s own test of being “shorter and sharper”. Much of the detail that has accrued over the years in response to the various corporate crises of the last quarter of a century has been stripped out, and as a result it is more clearly focused on the essentials.
In my experience it is always harder to remove requirements than introduce them, and I expect that there will be a lot of lobbying from those wanting to see their pet causes reinstated. I hope the FRC sticks to its gun.
In fact, there is one part of the Code which I would personally like to see trimmed further. This is the section now titled ‘Audit, Risk and Internal Control’. While it is understandable that the FRC wants to use the Code to reinforce its other regulatory responsibilities for financial reporting and auditing, this section has barely been touched and as a result stands out in contrast to the lean look of the rest of the Code.
Filling The Gaps
Perhaps more importantly than the deletions, some of the additions plug what were, with hindsight, significant gaps in the Code.
In particular, the enhanced first principle concerning the role of board sets the tone and context for everything that follows. It describes the function of the board as being “to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society [and] establish the company’s purpose, strategy and values, and satisfy itself that these and its culture are aligned”.
Opening the Code with this statement will hopefully help to ensure that boards and directors focus on the purpose of good governance, not just the process.
That is not to say that that good process is now irrelevant — it is still an essential underpinning to an effective board. Nor do I expect the new Code to bring about an end to box-ticking. In some organisations at least the instinct is too deeply engrained, or resources too heavily constrained, for fresh thinking to flourish.
Acting On The Message
But if the new Code can reinforce the message that the processes on which we have placed great store over the years are a means to an end, and not ends in themselves, then it will serve a very useful purpose. And boards that act on that message will hopefully increase their chances of attaining the real end — the long-term sustainable success of the company.