The Chartered Governance Institute calls on the FRC not to buckle under calls to weaken corporate governance provisions

The Chartered Governance Institute calls on the FRC not to buckle under calls to weaken corporate governance provisions

The Chartered Governance Institute, UK & Ireland, has responded to the Financial Reporting Council (FRC) consultation on the review of the UK Corporate Governance Code (the Code) to urge it to protect the huge benefits of the strong governance environment in the UK, balancing the desire to improve the Code against the proportionality of any additional reporting.

Peter Swabey, Policy and Research Director CGIUKI said,
‘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.’

Key points in the Institute’s response include:
• 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 company 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 to support board in making better decisions and increase trust in company reporting.
• 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.
• Our call on the FRC, as the regulator, to provide guidance on how and what companies should report on their climate ambitions and transition plans. These 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). Without clarity, others will 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.

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