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The Actuary The magazine of the Institute & Faculty of Actuaries

FRC announce review of Corporate Governance Code

UK businesses could face harsher punishment if they break principles of good corporate governance, after the Financial Reporting Council (FRC) announced a ‘fundamental’ review of the code today.

"Purpose of governance has gone from being ‘better oversight’ to ‘saving capitalism’" ©iStock
"Purpose of governance has gone from being 'better oversight' to 'saving capitalism'" ©iStock

The regulator is currently only able to fine and ban individuals who are members of professional bodies, but is now looking to extend its powers so it can enforce disciplinary action against all directors when there has been a financial reporting breach.

This comes after the government produced a green paper on how to improve corporate governance in November last year, with Theresa May stating at the time that the behaviour of a few had damaged the reputation of the many.

FRC chairman, Win Bischoff, said: “The Prime Minister has a vision of an economy that, in her words, ‘works for everyone’. This needs UK businesses to thrive so that all stakeholders including workers, customers, suppliers and society itself benefit through jobs growth and prosperity.

“With all this in mind, we will conduct a review of the current UK Corporate Governance Code. This will consider the appropriate balance between the code’s principles and provisions.

“Any changes to the regulatory frameworks and to the code will be done carefully and through full consultation with a wide range of stakeholders.”

Bischoff went on to say that the FRC would not ‘throw out the baby with the bathwater’ when reviewing the code, stressing that the unitary board, strong shareholder rights, role of stewardship, and the ‘comply or explain’ approach must be preserved.

The review announcement came at the launch of an ICSA report, The Future of Governance, which considers the suitability of the UK’s governance code and whether it is in need of reform.

It suggests that policy approaches towards issues such as income equality should be rethought, good governance standards should be promoted across all sectors, that mechanisms by which listed companies are held to account are improved, and that effective legal sanctions to punish bad business behaviour are introduced.

ICSA policy advisor, Chris Hodge, said: “The regulatory framework for corporate governance has not fundamentally changed since it was established 25 years ago, but our expectations of what it should be able to achieve have.

“The perceived purpose of governance has gone from being ‘better oversight’ to ‘saving capitalism’.

“While the framework is still well suited for its original task, it is not capable of preventing or effectively sanctioning bad behaviour by boards or directors or – on its own – of delivering public policy objectives.

“Encouraging good business practices, punishing bad business behaviour and promoting the public interest are interrelated objectives, but they are not the same and cannot all be achieved through the same mechanisms.’