FRC urged not to weaken corporate governance rules

Chartered Governance Institute also argues FRC Stewardship Code 'lacks effective enforcement'

The Financial Reporting Council (FRC) has been advised not to weaken rules around corporate governance for UK companies, amid pressure to dilute the rules from businesses that argue they are too onerous.

A review of the UK’s Corporate Governance Code is currently being undertaken by the FRC, which sets the code.

The Chartered Governance Institute, a membership body for governance professionals, has responded to the review to urge the FRC not to water down its rules in the name of ‘simplification’.

Peter Swabey, policy and research director at the Institute, said: “Calls to simplify legislation and regulation are regularly made by those suggesting the current regime is off-putting to large corporates. In some areas these may be justified, but not in that of governance.”

A strong reputation for governance practices is “an asset to the UK”, said Swabey, which adds “huge value” to the market and reassures shareholders and stakeholders. 

Governance rules “should not be diluted in response to a perceived trend in corporate behaviour”, he said.

Instead the Institute proposes companies take advantage of technology to ensure reporting can be kept up to date, through the use of company websites rather than always through the annual report.

Company secretaries and governance professionals should, the Institute added, be recognised for their “pivotal role” and specific expertise to support company boards in “making better decisions” and increasing trust in company reporting.

The Institute also wants to ensure materiality – judging what reporting is material to the company and what is not – is a matter for the judgement of the board alone.

“Allowing other stakeholders to second-guess this, based on their own values and interests, is not helpful,” the Institute’s response to the FRC stated.

The Institute is also calling on the FRC, as the regulator, to provide guidance on how and what companies should report on their climate ambitions and transition plans

“Without clarity, others will fill the vacuum, whereas FRC guidance would better enable companies to respond to reasonable expectations from stakeholders and regulators without confusion or ambiguity,” the Institute said.

However boiler-plate disclosures are, the Institute added “of little use to anyone”.

Finally the Chartered Governance Institute argued the FRC’s Stewardship Code “lacks effective enforcement”, and should be updated to recognise current investment market practice and to “give it more authority to strengthen shareholder engagement”.

Swabey acknowledged there is a balance to be struck between reporting criteria and getting on with the business of running a company, and that the rules need to be “proportionate”.

The Institute’s recent Boardroom Bellwether survey found 81% of respondents believe that, to some or to a large extent, increasing reporting requirements are reducing the time available for strategic discussions at board level. 

“The FRC must be confident that any changes it makes to the Code add value and that their impact is not overly onerous, encouraging the micro-management of companies by either regulators or shareholders,” Swabey said.