Amy Reeve 10 Jul 2018 05:32pm

Changes needed so FRC can act faster, says Haddrill

The regulatory framework must change for the accountancy watchdog to act quicker and be more transparent, according to Financial Reporting Council (FRC) CEO Stephen Haddrill

The FRC leader said public expectation of regulators has changed as trust in business has declined. “The language of deregulation has been overtaken by calls for tougher regulation and regulators, and rightly so.”

Competition, free trade and innovation should not come at the expense of fairness, he said, and business must be held to account. For that to happen, regulators must be “effective and efficient” and must keep pace with the desire for change.

Commenting on the current regulatory framework of the FRC, he said it has to act fast, be more transparent and challenge companies on everything they say in the annual report, particularly governance, which falls outside its present remit

He was speaking at the Governance Institute’s annual conference in London today. Minister for small business, consumers and corporate responsibility, Andrew Griffiths, also gave a ministerial address at the event.

Noting the UK’s need to be “highly competitive in its search for inward investment” post-Brexit, Haddrill said it has been a busy time for the FRC.

The regulator has been occupied with both revising the Governance Code and issuing guidance on non-financial reporting – which includes revising the Stewardship Code, engaging in thought leadership projects on the future scope of corporate reporting and audit – on top of its enforcement and sanctions duties.

The FRC has come in for public criticism in recent months. A joint inquiry by two select committees of MPs into the collapse of Carillion described the FRC as “useless” when it came to Carillion and its auditors, arguing that it was “toothless” and “ineffective” as a regulator.

In April the government launched an independent “root and branch” review to assess the FRC’s governance, impact and powers, to help ensure it is fit for the future, chaired by Sir John Kingman.

Haddrill said today that the FRC welcomes the Kingman Review, which some seven years after the last review of the regulator “is opportune – the work we do plays a key role in the economic wellbeing of this country”.

.Although the Governance Code is a strong framework that is “highly respected internationally,” Haddrill said companies “must play their part fully”. Weak or misleading leadership on corporate governance does not work – neither does a “tick box” attitude.

The annual report as a whole should be a true reflection of business, “fair and balanced”. Companies must consider the interests of others not just shareholders, Haddrill said. Employees, wider society, the environment, all of these would be undermined if not.

He said directors’ explanations of what companies do in relation to Section 172 of the Companies Act are “often insufficient”. Secondary legislation is therefore required so that “all companies of significant size explain their action in relation to that section”. Haddrill reiterated his desire for the FRC’s scope to be extended to cover governance matters.

Public confidence in business has been damaged by examples of high executive pay, rewarding failure, short-term business decisions and not distributing profit wisely, he continued.

The new code will enable remuneration committees to take broader responsibility, to make sure executive pay is aligned with the strategic objectives of the company and to use its discretion more. He said remcos should be able to explain to a workforce how executive pay aligns with company pay, and ensure the views of the workforce are carefully considered.

This expands to corporate culture, he noted. Boards should be clear about what behaviour it promotes, to ensure it offers healthy governance under pressure.

Although gender balance has improved, Haddrill acknowledged that “in some areas we haven’t had sufficient progress”. There are companies where a woman could fulfil the role of chairman, “but they are not in those sorts of positions”.

“Boards need to consider diversity and whether they have effective succession plans in place. This is a key element of the revised Code – to encourage boards and investors to engage in how this benefits the company.”

He said the length of service for a chairman “should be a matter of greater consideration; chair tenure could be restricted to allow for more effective succession planning.”

It is the board’s responsibility to determine that the balance of skills and background is diverse among senior management, to recruit talent from a wide pool to avoid groupthink.

“All of this will encourage effective and constructive challenge in the boardroom. Only through debate will issues be resolved. We must not stand still,” he said.

Business will only “regain respect, integrity and trust by delivering fair outcomes in the long term for all investors and society. This new Code is a strong blueprint for strong governance.”

Griffiths said that the government is prioritising the delivery of corporate governance reforms, which were announced last year following its Green Paper consultation.

This includes laying regulations in Parliament that require companies to explain how their directors take employee and other stakeholder interests into account under section 172 of the Companies Act.