The Financial Reporting Council has abandoned the majority of planned changes to the Corporate Governance Code, including tougher director accountability and reporting on clawbacks for misconduct
The original proposals set out plans to increase the accountability of directors with a requirement to provide a specific statement on malus and clawback policies, remuneration disclosure rules which would have made companies report on how they withheld or recovered pay from directors for misconduct, misstatement of accounts, and other serious failings. It was the first time the Code had been reviewed since changes in 2018.
There was widespread consensus that companies needed to be more transparent about director accountability following a string of audit and accounting scandals at major listed companies including Carillion, Thomas Cook and Patisserie Valerie in recent years.
Another proposal which has been dropped would have tightened up the rules on comply or explain, where companies can effectively opt out of mandatory requirements such as auditor rotation if the company is going through a significant financial transition or merger.
Only a small number of the original 18 proposals set out in the consultation will go ahead and it appears that the changes to the Code will be delayed, with a slower implementation timetable although the FRC did not clarify exact introductory dates. The revised Code will be issued in January 2024.
The regulator did not explain why it has watered down the plans, apart from saying that the diluted rules ‘were the right balance at the current time’ and would ensure that ‘the UK approach clearly differentiates from the much more intrusive approach adopted in the US’.
The decision to drop the new requirements is likely to have been driven by the government's push to reduce the reporting burden for business.
Economic secretary to the Treasury, Andrew Griffith, said: ‘We welcome these pragmatic and proportionate changes by the FRC.
‘The UK rightly enjoys a strong reputation for high governance standards but it’s important that we don’t burden our best and brightest companies to the extent that it’s not a level playing field versus our international competitors.’
The FRC indicated that the decision to drop the majority of the reforms was the result of pushback from companies.
The FRC said: ‘There will be a small number of changes that streamline and reduce duplication associated with the Code that were overwhelmingly supported by stakeholders in the interests of reducing burdens.
‘The main substantive change we will take forward concerns revisions to our original proposal on internal controls. The decision has been informed by very helpful stakeholder feedback to ensure we end up with a more targeted and proportionate Code revision.’
The FRC has abandoned the remainder, over half, of the original proposals. These include measures relating to the role of audit committees on environmental and social governance, and modifications to existing code provisions around diversity, over-boarding, and committee chairs engaging with shareholders.
A number of other proposals will also be dropped as a result of the government’s recent decision to withdraw legislation relating to an audit and assurance policy, reporting on distributable profits and resilience statement requirements.
The FRC will publish an updated Code in January 2024, but thought stakeholders would welcome early sight of what to expect at that point to aid their planning.’
The rollback on corporate governance reforms came less than a month since the government u-turned on plans for reform of non-financial corporate reporting. This would have seen the introduction of audit assurance reports, greater disclosure on dividend information and resilience statements.
FRC CEO Richard Moriarty said: ‘Following the extensive consultation with stakeholders on the UK Corporate Governance Code, the FRC will be taking forward a focused number of proposals to strengthen corporate governance outcomes, improve internal controls and reduce reporting burden and duplication.’