The Chartered Governance Institute of the UK & Ireland calls for balance in the latest FRC consultation response

The Chartered Governance Institute of the UK & Ireland has submitted our response to the Financial Reporting Council (FRC) consultation on the review of the UK Corporate Governance Code (the Code). Our response calls for balance in the Code, as the Institute recognises the importance of a strong governance environment in the overall UK economy, while acknowledging that any increasing reporting requirements are taking time away for strategic discussions at the board level.

Our response included a recognition of the value of the Code to the UK economy. The strength of the Code and the overall governance ecosystem helps to reinforce trust in the UK economy for shareholders and stakeholders alike.  

In order to balance the needs for robust reporting and the time available at the board level, it has been suggested that reporting can be kept up to date using company websites rather than always being through the annual report.

Furthermore, company secretaries and governance professionals should be recognised for their pivotal role in corporate governance. In particular, their specific expertise to support the board in making better decisions and increasing trust in company reporting.

We also pointed out that materiality is a matter for the judgement of the board alone. The board has the best perspective on what reporting is material to the company and what is not. Ultimately, other stakeholders attempting to second-guess this based on their own values and interests, is causing further time constraints on the board.

We called on the FRC to provide guidance on how and what companies should report on their climate ambitions and transition plans. Guidance should vary depending on the sector they operate in and the pace of change appropriate to their business. We recognise the need for consistent reporting, but we wish to avoid duplicating existing regulations and guidelines, such as the UK Sustainability Disclosure Standards (SDS). The FRC is the best positioned to provide such guidance, since it would enable companies to respond to reasonable expectations from stakeholders and regulators without confusion or ambiguity.

Our response points out the danger that the ever-increasing breadth and depth of required topics for disclosure can contribute to a rise in boiler-plate disclosures. This can result in companies feeling obliged to report on issues which they believe are simply not material to their business. Rather than driving meaningful change, this simply becomes a time-consuming exercise that is beneficial to no one.

Finally, that The 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.

‘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, where we believe that a strong reputation for governance practices is an asset to the UK, adding huge value to the market and reassuring shareholders and stakeholders alike. They should not be diluted in response to a perceived trend in corporate behaviour.

But there is an important balance to be struck within the Code.  It is right and important that management attention is spent on reporting, but this should not unduly redirect attention away from business matters. The amount of reporting required of companies, and the complexity of regulation to which they are subject, must be proportionate. Our recent Boardroom Bellwether survey highlighted that 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. That cannot be the intention. And it is essential that changes to the Code do not add to that burden.

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.’ - Peter Swabey, Policy and Research Director, CGIUKI

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