The Institute of Directors has today submitted its consultation response to the Financial Reporting Council in respect of proposed changes to the UK Corporate Governance Code.
The IoD is a strong advocate of a principles-based approach to corporate governance regulation. This underpins its overall support for the UK Corporate Governance Code.
In its response, the IoD sets out the following additional key points:
- Unlike some commentators, the IoD does not believe that the Code is deterring significant numbers of companies from listing in the UK. However, the FRC could better emphasise the flexibility inherent in the Code and the importance of avoiding a ‘tick box’ approach to assessing standards of governance.
- The Code must avoid being too prescriptive about how boards organise their activities. Boards are better placed than regulators to determine the best interests of their companies. For example, the FRC is recommending that the audit committee should take responsibility for ESG disclosures, controls, processes, and assurance. However, an individual board might reasonably determine that a sustainability committee, an ESG committee or the board as a whole is the more appropriate mechanism through which to oversee these areas – especially if the audit committee is already overburdened.
- IoD members are concerned about the substantial volume of reporting, declarations and disclosures which the Code and other regulatory requirements are imposing on companies. The Code should seek to obviate these concerns by minimising the reporting burden wherever possible. For example, when reporting on the effectiveness of their risk management and internal control systems, the Code should encourage companies to adopt a high threshold in terms of materiality, clarity and succinctness rather than a scattergun approach.
- Executive pay is a controversial issue, and the FRC are right to tighten the Code’s provisions in this area. It is important for the reputation of the entire UK business community that senior executives are not seen as being rewarded for failure or misconduct. The IoD supports greater transparency in the Code around malus and clawback, and also for their incorporation into employment contracts.
Commenting on the response, Dr. Roger Barker, IoD Director of Policy and Governance, said:
“The effectiveness of the UK’s ‘comply or explain’ approach to governance is dependent on the willingness of investors and other stakeholders to thoughtfully consider possible deviations from the Code. Our perception is that this does not always happen. If businesses feel that they must comply, then the Code risks becoming seen as a regulatory ‘burden’ rather than a repository of good governance practices.
“It is also important that the Code does not become too prescriptive about how boards should organise their activities. If too much of the board’s agenda is imposed upon it by regulators and other external actors, then lines of accountability will be blurred, and the board’s role will be reduced to that of a glorified compliance function. This is in nobody’s long-term interests, and will reduce the capacity of UK companies to grow and compete.
“In particular, we are concerned that too many burdens are being placed on audit committees, particularly with regard to ESG. Depending on a company’s circumstances, a sustainability committee, an ESG committee or the board as a whole may be viewed as a more appropriate way for the board to oversee these important issues. The ability of individual boards to make their own judgements should be preserved as much as possible.”