FRC updates ­Corporate Governance Code

Following the global economic crisis, it is little wonder that corporate governance, board accountability and risk awareness have come under the spotlight.

The UK has already had one deep look into how boards manage risk in financial firms – the Walker Review – which found that directors needed to get a much firmer grip on risk management. Now, the Financial Reporting Council (FRC), the UK’s corporate governance regulator, has introduced changes to the Corporate Governance Code – formerly known as the Combined Code – to improve board effectiveness and increase accountability in the UK’s largest companies.

Clear statement
Retaining its core principle that companies either need to follow the code or explain how else they are acting to promote good governance, the latest changes include a clearer statement of the board’s responsibilities relating to risk and an annual re-election for all directors in FTSE-350 companies.

The FRC also wants to ensure that companies promote greater boardroom diversity, that people should be appointed on merit and from different backgrounds, while more women should be approached.

Furthermore, the revised code encourages chairmen to report personally in their annual statements how the principles relating to the role and effectiveness of the board have been applied.

The FRC hopes that the change will result in companies releasing more specific information that is pertinent to the company’s risks and objectives, rather than general boilerplate data that, it says, “Is so often the preferred and easy option in sensitive areas, but which is dead communication.”

The FRC wants to see more active shareholder engagement to ensure boards are held to account over the strategies – and risks – their organisations take. The regulator was set to publish its Stewardship Code as Financial Director went to press, which was a recommendation under the Walker Review to urge institutional investors to explain their level of engagement with company boards.

However, while several institutional investors and business groups have welcomed some of the FRC’s changes to the code, they also have reservations about others. The Confederation of British Industry believes that the annual election of directors could lead to short-termism and individual directors – rather than the board collectively – being targeted at annual general meetings. It also believes that the change may make boards less stable and discourage robust challenges in the boardroom.

On merit
The Institute of Directors believes that to diversify the boardroom purely on gender grounds – as opposed to professional background and qualifications – is simplistic and unhelpful.

“Directors should be judged on the basis of their individual qualities, not according to gender or other socioeconomic characteristics,” it says.

Separately, the European Commission has launched its own consultation on whether new laws or guidance are needed at European Union level to improve corporate governance. Limiting its focus to financial services businesses at present, the green paper floats a series of potential governance reforms, such as new duties for directors, better risk reporting and a wider remit for external auditors.