News February 2017 FRC responds to Green Paper on Corporate Governance Reforms

FRC responds to Green Paper on Corporate Governance Reforms

21 February 2017

PN 9/17

The interests of stakeholders, executive remuneration, the accountability of large private companies and effective enforcement are key themes in the FRC’s response to the Government’s Green paper on Corporate Governance reforms (PDF). 

The UK corporate governance framework is respected worldwide and any changes need to build on its current strengths including the unitary board and the ‘comply or explain’ approach. Demands on the framework are growing and the FRC believes more needs to be done to win back public trust.

The FRC proposes reform in four areas.
  • The interests of major stakeholders. The Companies Act places a duty on directors of all companies to promote the success of the company, and in so doing have regard to a range of other factors, such as long-term consequences, the environment, employees, suppliers and customers. This duty must be reinvigorated. Companies should be required to report more effectively on how they have discharged it.
  • Executive remuneration. The role and remit of the remuneration committee should be extended to cover pay policies throughout the organisation. Remuneration policy and payments should have a much clearer link to delivery of strategy, focusing strategy and outcomes which deliver long-term company performance.
  • Large private companies. They must be more accountable to their stakeholders given their significance to the public interest and the privilege and benefits of limited liability status. The FRC supports the introduction of corporate governance principles for such companies and associated reporting. The FRC is well placed to develop this.
  • Effective enforcement of the law. The regulatory framework is fragmented, with gaps in enforcement action. The FRC also proposes extending its powers to investigate and prosecute all directors for financial reporting breaches and associated issues of integrity, rather than only accountants and actuaries.
Last week the FRC announced plans for a fundamental review of the UK Corporate Governance Code. This will take account of work done by the FRC and others on corporate culture and succession planning, and the issues raised in the Government’s Green Paper and the BEIS Select Committee inquiry. The review will build on the Codes globally recognised strengths developed over the past 25 years while considering the appropriate balance between its principles and provisions and the growing demands on the corporate governance framework.

Notes to editors:
  1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.  The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.