KPMG’s Tim Copnell offers an appraisal of the FRC’s new corporate governance regime and what it means for UK businesses.
The big question following the financial crisis is whether the UK corporate governance regime had been shown to be unfit for purpose or whether any governance failings were simply down to poor implementation.
In publishing the new UK Corporate Governance Code, the Financial Reporting Council (FRC) appears to have erred on the side of ‘poor implementation’. In short, the new Code (formally the Combined Code) emphasises the importance of board behaviour, the role of the chairman and the long-term success of companies. Compliance alone cannot guarantee effective board behaviour so boards are encouraged to think deeply, thoroughly and on a continuing basis about their role and responsibility and how they discharge their duties both individually and as a board.
This emphasis on behaviour is well founded. If there is one thing the recent financial crisis demonstrated, it’s that no single governance model emerged as being better or more capable of dealing with the issues leading to the crisis than any other. What we have seen, however, is the marked difference in behaviours employed by different boards, investors and regulators.
Influencing decision making behaviour
The FRC has not taken an entirely soft-touch approach. Re-emphasising the role of the chairman, board behaviour and ‘comply or explain’ is all very well, but some of its recommendations have proved more controversial. One such recommendation is that all directors of FTSE 350 companies should be re-elected annually. The intention is to bolster personal accountability, but boards and shareholders alike should take care to ensure that such practice doesn’t have the unintended consequence of driving short-term behaviour and weakening collective decision making.
Tim Copnell is head of corporate governance at KPMG.