Addressing corporate governance reform concerns in a changing landscape

It’s been nearly four years since the Brydon report was published and nearly five since the Kingman report. Both contained clear recommendations in relation to audit and corporate governance reform, most of which are conducive to the initial goals of enhancing corporate governance, increasing transparency and avoiding surprising corporate failure.

In the last four years we’ve seen four prime ministers, economic downturns, conflict in Eastern Europe, and more recently the Middle East, as well as a global pandemic. It is hardly surprising that there has been substantial resistance to the reform plans. However, the original rationale remains and is still intellectually robust.

That said, it was still an unexpected development to many when the government announced that it was shelving its “draft regulations consultation after companies raised concerns about imposing additional reporting requirements.”

But where does this leave those who had started projects to prepare for the impending changes and those considering their next steps?

The future of corporate governance reform – what should you do now?

Since the laws were never really the driver for making improvements to governance, the majority of organisations with programmes in flight are continuing. Most organisations started these programmes because they see the benefits of a stronger control environment, better Board visibility and more targeted assurance.

In light of the government shelving official reforms, below we have set out each proposal and our suggestions for what businesses should do next. This should be considered in the knowledge that the Financial Reporting Council’s (FRC) consultation on its proposed amendments to the Corporate Governance Code (the Code) is still ongoing, the results of which, expected in Q4, may change the considerations outlined below.
 

 
 

Original proposal

Impact of withdrawal
secondary legislation

Considerations

1

Resilience statement

  • Proposal has been withdrawn with the secondary legislation.
  • Current requirements, including viability statement and going concern statement, remain for listed companies and those who elect to comply.

  • Recommend pausing work until the outcome of the FRC’s Corporate Governance Code consultation.

2

Capital maintenance and disclosures regarding dividends

  • Proposal has been withdrawn with the secondary legislation.

  • Recommend no further work performed.

3

Audit and Assurance Policy (AAP)

  • Proposal has been withdrawn with the secondary legislation.

  • Requirements for an AAP were included in FRC’s Corporate Governance Code proposed revisions.

  • Impact remains unclear as the FRC may opt to retain this requirement or in some part.

  • Impact unclear until the FRC publishes the final Code revisions.

  • Consider the need to pause work in this area until such date that the revised Code is finalised.

  • The fundamental benefits of developing an integrated assurance map remain relevant, especially when considering next steps in respect of the risk management and internal controls declaration.

  • The AAP continues to support determining the extent of assurance over significant risks and key controls.

4

Reporting risks and internal controls declaration

  • No impact by the withdrawal of secondary legislation.

  • Requirements for a Board declaration were included in FRC’s Corporate Governance Code proposed revisions.

  • Continue with planned workstreams focusing on ‘no regret’ activities and significant risk areas relating to financial reporting risks.

  • Other reporting risks should also remain a focus given proposed revisions to the Code.

  • This is subject to the finalisation of the revised Code.

  • The role of the Audit Committee with regards to risk, internal controls and other reporting risks, such as ESG, remains a growing area of focus which is likely to increase.

5

Fraud statement

  • Proposal has been withdrawn with the secondary legislation.

  • However other regulation regarding failure to prevent fraud still being introduced for large organisations, such as the Economic Crime and Corporate Transparency Bill.

  • Continue to ensure that processes and controls are in place to prevent fraud.

  • The ‘failure to prevent fraud’ offence is still being recommended by the Government.

  • There is also an intrinsic link between fraud risk within an effective internal control framework.

6

New regulator

  • Proposal has been withdrawn with the secondary legislation

  • Government has stated “remains committed to wider audit and corporate governance reform, including establishing a new Audit, Reporting and Governance Authority to replace the existing Financial Reporting Council”.

  • Monitor further announcements regarding the establishment of a new regulator.

  • Anticipate that the new regulator will have greater powers and the focus on Director accountability is likely to remain, especially regarding risk, internal control and fraud.

7

Public interest entity (PIE) definition

  • Revised PIE definition (750:750) has been withdrawn with the secondary legislation

  • Revised Code will be applicable to main market listed companies and those who chose to apply it.

  • Monitor FRC announcements in respect of amendments to the Code.

  • Scope of new Regulator including oversight of Director accountability may expand beyond the current PIE definition.

  • There remains a focus to drive greater accountability in general therefore a wider definition of in-scope entities may still be considered through the Code or new Regulator.

 

In the wake of the announcement, stakeholders find themselves at a critical decision point, tasked with redefining the path towards enhanced transparency, accountability, and responsible business conduct. The appetite from investors is undoubtedly still there, and rather than signalling an instant pause to proceedings, this should be viewed as a catalyst for creative and collaborative solutions, whilst keeping one eye on proportionality and pragmatism. We also note that the requirement for a controls declaration remains, and this has been the focus of most companies efforts to date.

In a world where businesses are constantly searching for a competitive edge, does voluntary adoption and self-regulation of now shelved legislation offer businesses an innovative way to appease a market hungry for transparency?  Or will the FRC drive a corporate governance shift through regulation?

In essence, the shelving of legislation should be an opportunity to recalibrate your strategies rather than a cause for stagnation. It invites stakeholders to demonstrate resilience and adaptability in the pursuit of a corporate governance framework that reflects the evolving expectations of a responsible and conscientious society.

By embracing our suggested actions, you can ensure that the spirit of reform endures, irrespective of legislative delays, and pursue a corporate landscape defined by integrity, accountability and sustainable practices.

If you have any queries or would like further information, please contact Michael Stallard.