Save content
Have you found this content useful? Use the button above to save it to your profile.
Despair in the boardroom
istock_urbancow_br

FRC bids for increased powers with code review

by
21st Feb 2017
Save content
Have you found this content useful? Use the button above to save it to your profile.

The Financial Reporting Council (FRC) has instigated a “fundamental review” of its corporate governance code, with issues such as executive pay and stronger employee representation in the boardroom brought to prominence amid concern over the public’s trust in big business.

In a statement the accounting watchdog said will look at sweeping reforms to its regulations, as it appealed to the government for new powers to fine and ban directors over accounting failures and wrongdoing.

The voluntary code is currently used to hold companies to account, and is how UK boardroom behaviour has been monitored for the past 25 years. The code was tweaked last year to take account of European accounting directives, and was not due for further changes for another few years.

Theresa May has pledged to 'reform capitalism' and 'stamp out irresponsible corporate behaviour'"

However, the code has recently come under intense scrutiny following numerous corporate scandals, including Sir Philips Green’s management of collapsed retail giant BHS and Sports Direct’s numerous infringements of company law.

Prime Minister Theresa May came to power last year pledging to “reform capitalism” and “stamp out irresponsible corporate behaviour”, and the government published a green paper last year that sought views on boardroom pay and directors’ responsibilities, which closed last Friday.

Fresh slate

May's words seem to have stirred the FRC into action. Catherine Horton, corporate governance policy adviser at the watchdog, told AccountingWEB that in its 25th year in existence the review gave the FRC the opportunity to start with a ‘fresh slate’ to produce something that is ‘fit for purpose’ in the world of modern business.

While the fact that government pressure seems to have pricked the heels of the FRC into reviewing their code may frustrate ordinary members of the public struggling to make their voices heard, if the right outcomes are reached then those operating the levers of power can claim their processes are working. 

The body will start a consultation on its proposals later in 2017, based on the outcome of a review and the government’s response to its green paper.

Increased powers to ban directors

The FRC is currently only able to fine and ban members of professional bodies, most often accountants, auditors and actuaries, but cannot sanction boardroom directors who are not part of such organisations.

Speaking on the Today programme, chief executive Stephen Haddrill said that it was “fundamentally unfair” the watchdog did not have the power to debar directors in relation to financial reporting matters.  

Haddrill went on to say that it was not in the public interest that the FRC can pursue high profile cases like Rover or Farepak, and proceed against accountants but not directors who are often involved in the same kinds of wrongdoing.

Rules ‘not the UK way’

With the government talking tough on issues such as executive pay and employee representation, efforts to revamp UK corporate culture could spell an end to the ‘light-touch’ approach that has characterised recent UK governance, and signal a move towards the rules-based regulations seen in America.

However, the FRC’s Catherine Horton does not agree. She told AccountingWEB that it’s “not the UK way” to go down the rules route.

“We’ve gone through 25 years’ worth of compliance saying we like the flexibility that gives,” said Horton. “It allows companies to be in better compliance than simply minimum legal standards, and the bottom line tends to be much higher than would otherwise be the case. It also allows companies to select against the provisions in times when they feel they need to.”

Four areas of reform

The FRC proposes reform in four broad areas:

  • The interests of major stakeholders: Directors of all companies must take account of a wide range of ‘company success factors’, such as long-term consequences, the environment, employees, suppliers and customers
  • Executive remuneration policy and payments should have a much clearer link to delivery of strategy, focusing strategy and outcomes which deliver long-term company performance
  • Large private companies must be more accountable to their stakeholders given their significance to the public interest and the privilege and benefits of limited liability status
  • Effective enforcement of the law: The regulatory framework is fragmented, with gaps in enforcement action, hence the FRC’s proposals to extend its powers to investigate and prosecute all directors for financial reporting breaches

 

What measures would like to see put in place to police big business? And is the FRC the right body to do this?

Tags:

Replies (1)

Please login or register to join the discussion.

By SteveHa
22nd Feb 2017 09:18

Odd that this is published on the same day that the HSBC CEO gets an increase taking his remuneration package to £7.6m in spite of substantially depleted profits (in excess of 40%).

Thanks (4)