UK Corporate Governance Code – consultation: The CGIUKI response

Of interest to all working in governance

As mentioned in previous Technical Briefings, on 24 May, the Financial Reporting Council published its long anticipated consultation on the UK Corporate Governance Code, the intention of which was to focus on the legislative and governance reforms that the Government proposed in its May 2022 white paper “Restoring trust in audit and corporate governance”. These were designed, amongst other things, to “support the FRC’s transition into the Audit, Reporting and Governance Authority (ARGA).”

The Institute has submitted its response to the consultation, which closed on Wednesday (13th September).

We are grateful to all those members who took part in our roundtables and discussion sessions and to those who wrote to us to offer their views on the issues raised in the consultation. All contributions were much appreciated, although I am sure that you will understand that, especially as there were mixed views on some questions, not all could be incorporated into the final response.

I have outlined below some of the key issues, but the full response is available on our website.

The UK is already a strong governance environment in global terms and it is important that the FRC is confident that any changes it makes to the Code add value and that their impact is not overly onerous, particularly through encouraging the micro-management of companies by either regulators or shareholders.  Whilst many of our members were generally supportive of the proposed changes, others took the view that some carry a risk of making the UK corporate environment overly-governance focused, increasing box-ticking and boilerplate.  The text of the FRC’s guidance will be enormously important in ensuring that this is not the case, and the Institute stands ready to assist with the development of appropriate guidance. 

A number of themes have emerged in our response:

  • The enormous respect for the value that the Code adds to the UK market
  • The need to take advantage of technology to ensure that reporting can be kept up to date, through the use of corporate websites rather than always through the annual report
  • The pivotal role of company secretaries and governance professionals in corporate governance, and the importance of their specific expertise
  • The need to ensure that materiality is a matter for the judgement of the board alone. Only the board is in the appropriate position to judge what reporting is material to the company and what is not; allowing other stakeholders to second guess this, based on their own values and interests, is not helpful.
  • Climate ambitions and transition plans will vary between companies depending on the sector they operate in and the pace of change appropriate to their business. There is a need for consistent reporting but also to avoid duplicating existing regulations and guidelines, such as the UK Sustainability Disclosure Standards (SDS). We call on the FRC, as the regulator, to provide guidance on how and what companies should report on. The alternative is to leave it to others to fill the vacuum, whereas FRC guidance would better enable companies to respond to reasonable expectations from stakeholders and regulators without confusion or ambiguity.
  • The ever increasing breadth and depth of required topics for disclosure can contribute to a rise in boiler-plate disclosures, in particular where companies feel obliged to report on issues which they believe are simply not material to their business. And boiler-plate disclosures are, we would suggest, of little use to anyone.
  • 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.

As I said in the press release that we issued to accompany our response:

‘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 are 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.’

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