Corporate governance code: FRC consults on proposed changes
The Financial Reporting Council (FRC) is now consulting on a revised version of its corporate governance code. The body said the new edition was a “shorter and sharper” version reflecting the changing business environment.
It’s been 25 years since the code was launched in the wake of the Cadbury Report. To many critics, the old code was struggling to cope with the realities of modern business.
The revised code comes at a difficult time for British business. The relationship between business and society, as Theresa May lamented when she became PM, appears to be in the doldrums. A slew of scandals and a bitterly contested EU referendum vote have taken their toll.
“There was a sense at a political level that there was a lack of trust in business,” commented David Hackett, CIMA’s financial policy specialist. “Big business was becoming detached and some of the scandals were playing into this narrative.”
At the back end of last year, the government put out a green paper to address some of these issues, including inequality, boardroom representation and scandals. The government requested that the FRC consider their proposals.
“The FRC, as it happened, was already looking into these issues,” explained Hackett. The consultation stems from the council’s investigation. Most notably, the consultation performs coup de gras on Theresa May’s proposal to have worker representation in the boardroom.
'Anodyne and placebo-style' proposals
May had already pulled back from her post-election pledge somewhat, but the consultation seems to signal the complete abandonment of the idea. It waters board representation down “almost to homeopathic levels,” said Gerry Brown, chairman of NovaQuest Capital Management and author of The Independent Director.
The FRC’s revised code offers three choices: assign a non-executive director to represent employees; nominate a director from the workforce; or create an employee advisory council. Brown labelled these proposals as “anodyne” and “placebo-style” proposals.
CIMA’s Hackett, however spoke favourably of the FRC’s proposals. “Generally, it’s clear that boards benefit from greater diversity and greater perspectives. Workforce is one perspective, but I don’t think we want to say, necessarily, ‘we’re going to place a worker on every board’. That’s a little too simplistic.
“The workforce’s view should be covered through the broad gamut of people that are there, either through a NED or someone else. We wouldn’t want a prescriptive or narrow application.”
For Brown, the consultation and any changes are doomed to fail, as they will retain the code’s “comply or explain” policy. That is, companies that ignore it must provide an explanation. “The consultations appear to redefine toothlessness as well as green light and turbo-charge further board-level scandals rather than actively seek to hinder them,” Brown said.
“What the FRC really needs to do is to administer some stiff medicine, not least encourage greater shareholder activism (to ensure boards are held to account) and embrace greater diversity.”
CIMA’s Hackett explained that authorities have traditionally favoured working with industry on a voluntary basis. “It’s not primary legislation, it is very much the industry coming together and saying these are the standards we adhere to,” he said. “It’s voluntary, but I think, broadly that companies believe they need to go with it.”
CIMA’s focus, Hackett said, will be to drive more focus on the business models. “We want the code to give a greater understanding of creating value and how that value can be destroyed by cutting corners.”