April 24, 2014 FRC launches governance consultation
Those who believe corporate governance to be a fixed and immovable object need to think again. Governance is a flexible entity which responds to changing technology, market conditions and ethical values in order to create the best outcomes for investors, employees and customers, not to mention the wider world and the organisation itself.
Whilst corporate governance ideals may have had a greater shaking up than usual as a result of the recession, that doesn’t mean that there can now be a period of consolidation. On the contrary, if corporations are to avoid repeating the failures of the past then governance has to be at the forefront of ethical change. Indeed we are already seeing regulatory, national and international bodies placing an increasing emphasis on governance in both discussion and regulation. For example just last month we reported on a consultation launched by ACCA which aimed to add shape and clarity to corporate governance practices.
Now, in the UK the Financial Reporting Council (FRC) has launched its two-yearly review of changes to the Corporate Governance code. Originally established in 1992, the code is designed to set out “good practice for UK listed companies on issues such as board composition and effectiveness, risk management, directors’ remuneration and relations with shareholders.” In this revision the FRC have proposed alterations in five main areas, namely:
- Placing greater emphasis on ensuring that remuneration policies are designed with the long term success of the company in mind
- Recovering or withholding variable pay or deferring remuneration when appropriate
- Engaging shareholders when a significant percentage have voted against a resolution
- Providing clarity about ‘going concern’ accounting policies
- Assessing and managing principal risks, including monitoring risk management and control systems annually, reporting on whether risk and liabilities will affect the continued operation of the organisation
In a bid to cut down on the size of annual reports the FRC is also consulting on whether some or all of the corporate governance report could be published online. Subject to responses received this may form part of the main review in 2016. The closing date for the consultation is 27th June and, subject to response, it is intended to implement the changes for organisations whose financial years begin on or after 1st October 2014.
In launching the consultation the FRC’s CEO, Stephen Haddrill, said “These proposals, which reflect the views of investors and others on earlier consultations, are intended to encourage boards to focus on the longer-term, and increase their accountability to shareholders.”