26 January 2018 by Peter Swabey
The attempt by the FRC to move away from a compliance mindset is laudable
When an old friend has a makeover, it is not always easy for those of us who, like me, tend to be sceptical of change.
On 5 December, the Financial Reporting Council published their consultation on proposed revisions to the UK Corporate Governance Code. Despite my instincts, I generally thought that the team at the FRC did a good job at focusing the code more on principles and less on provisions.
The aspiration – to encourage people to focus on the purpose of corporate governance and how it can be used to underpin the long-term health of the company, rather than see it as a compliance exercise – is entirely laudable, but the compliance mindset may not be easy to eradicate, being both deep-rooted and widespread.
It can be found in investors and their advisers, and among the media and other commentators, as well as in companies, and it is arguably being reinforced by the increasing regulatory requirements for governance.
The proposed additions to the code relating to topics like corporate purpose and culture and stakeholder engagement are some of the issues with the most pressing need for attention. Our recent guidance on how to get the stakeholder voice into the boardroom, produced with the Investment Association, complements this approach.
There may, however, be a difference of opinion on the deletions. Everybody has a different list of what they consider to be the essential components of effective governance and some are bound to be disappointed when they discover the FRC’s does not match their own.
Although the FRC has shrunk the number of ‘comply or explain’ provisions in the draft code, there are still over forty of them. There are many boxes to be ticked by those who are determined to do so and the FRC may not be able to turn the tide on its own.
As I keep saying, this consultation is probably the most significant development in the governance world this year and will affect the daily lives of many of our members working in the corporate sector. So it is important that our response is considered and comprehensive.
“There are many boxes to be ticked by those who are determined to do so and the FRC may not be able to turn the tide on its own”
There are some proposals that struck me as good ideas, but others which did not and, as the professional body for company secretaries, the UK’s primary governance professionals, we will need to look at these in detail before feeding back to the FRC.
We are planning a detailed article summarising our views in the next edition of Governance and Compliance, but at the moment we are still seeking feedback from members – so if you have strong views let us know.
One essential function of the company secretary is to ensure that the board have the information and support necessary to operate effectively.
On 19 December, we published a report that is the first output from our project with Board Intelligence to help organisations to make their board packs more useful to directors, tackling fears that board packs are too backward-looking, internally-focused and operational to enable board members to engage in forward-looking and strategic conversations.
Concerns about the usefulness and usability of board packs are not purely a factor of the size or complexity of the organisation, but are shared to some degree by most organisations of all sizes and sectors.
We will be developing a tool with Board Intelligence that will let organisations assess the length and balance of their board packs and find ways in which they can be improved.
We will also be producing guidance to help company secretaries and other governance professionals address some of the problems identified by this research. Chris Hodge gives more detail of the research elsewhere.
As I drafted this article, the dreadful news about the collapse of Carillion was hitting the press. It is too early to assess whether this is another ‘governance scandal’ or simply a business failure, as the two do not necessarily go hand in hand.
However, I am sure that there will be those who say that it is the fault of poor governance and those who assert that the cause, by a curious coincidence, is the result of insufficient attention being paid to their own area of special interest.
There will be an inevitable scrutiny of board decision making, the role of the auditors and the pay packages of those who led the company, among other factors, but for now I think we should be thinking of those who, through no fault of their own, are concerned for their jobs, whether as employees of Carillion or of the many small businesses who were its suppliers.
As always, I would be happy to receive any feedback or suggestions as to what the policy team can do on firstname.lastname@example.org