Jessica Fino 16 Jul 2018 12:18pm

Business world reacts to new Corporate Governance Code

The publication of the new Corporate Governance Code by the Financial Reporting Council (FRC) has received mixed reactions from the business community

While the majority of business groups, accountancy firms and think tanks welcomed the reforms, some said they were not the “shake-up of corporate Britain” the government has previously promised.

Roger Barker, head of corporate governance at the Institute of Directors, welcomed the Code, particularly its "engagement with a wider range of stakeholders including the workforce, as well as encouragement of more long-term oriented business behaviour and recognition of the board's role in overseeing a company's purpose and culture".

However, he said he was disappointed that a crucial recommendation for directors to undertake continued professional development has been demoted to the guidance.

"The role of the modern director is increasingly complex and specialised, and there is an ongoing need for these individuals to take stock of their competencies. By removing reference to the professional development of directors from the Code and only mentioning it peripherally in the guidance, the FRC risks indicating to directors that it is not important," he explained.

Frances O’Grady, TUC general secretary, also said that, while the reforms are a step in the right direction, they are “not the shake-up of corporate Britain Theresa May promised and the country needs".

She said, "While it’s good this new code recognises the importance of workforce engagement, the real test is whether companies give workers more of a say in how they are run.

"The government should have stuck to its commitment to make workers on boards mandatory."

Matthew Fell, CBI UK chief policy director, welcomed the new Code by saying, "Companies should define their most important stakeholders – which will often be employees – and then set out how they choose to engage with them to take their views into account. It is helpful to see this new emphasis by the FRC".

Meanwhile, Timothy Copnell from KPMG’s Board Leadership Centre said, "Engaging with and contributing to wider society must not be seen as a compliance exercise – rather it is fundamental to building confidence among stakeholders, ensuring trust and in turn, the long-term success of a company.

"Retaining a degree of flexibility around how boards gather the views of the workforce is to be commended as one size doesn’t fit all. Nevertheless, it would be unfortunate if boards were too quick to dismiss the idea of appointing directors from the workforce simply because it sits uncomfortably with the traditional UK corporate governance framework."

Hywel Ball, EY’s UK head of audit, said, "The new shorter, sharper UK Corporate Governance Code marks an important step towards encouraging greater long-term decision making and helping to restore the declining levels of trust in business. The relationship between companies, shareholders and stakeholders is built into its core, focusing on the importance of long term value creation.

"The new Code calls for companies to establish a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and supports diversity. There are also new provisions to encourage greater board engagement with the workforce to understand their views, as well as an acknowledgment of the important role played by investors in delivering high standards of governance and long-term investment in the UK."

A Deloitte spokesperson said, “We welcome the FRC’s proposed changes, which fit well with other parts of the government’s governance reform package and the new reporting legislation issued in June.

“Company purpose and stakeholder engagement take more central roles in the revised Code and companies will need to ensure they address these areas with integrity, as they will be quickly exposed if their statements do not ring true to stakeholders."

 Scarlett Brown, head of research and policy at Tomorrow’s Company, said the group particularly welcomes the embedding of s172 into the code.

“We believe a major gap has opened between shareholder and stakeholder expectations, but stakeholder engagement can risk becoming a buzzword. It needs to be done meaningfully and boards will need to be innovative about how to engage. ‘Stakeholders’ are broad, and we must resist relying solely on employee, shareholder or supplier surveys and calling it ‘engagement’.

“The Code changes overall are to be welcomed, and we hope to see it drive standards of governance and board practice across the market," she added. "We hope to see it connected to wider government industrial strategy, so that we can move towards a joined-up approach to long term wealth creation."

Paul George, executive director of corporate governance and reporting at the FRC, explained that because the code retained its ‘comply or explain’ approach, businesses could engage “meaningfully” with it.

“A renewed emphasis on the principles of the Code and how they have been applied will also encourage more meaningful board engagement and shifts the trend from a tick box approach to governance,” he said in a blog post.

Jenni Field of the Chartered Institute of Public Relations said the new provisions push for better board engagement, as well as calling on boards to describe how they have considered the interests of stakeholders, particularly the workforce.

“Boards should also regularly refresh their membership to ensure diversity, the right mix of skills, experience and constructive challenge,” she pointed out.

Andrew Ninian, director of stewardship and corporate governance at the Investment Association, welcomed the emphasis the Code places on the importance of boards understanding the views of all stakeholders . "This will help ensure that directors are making the best long-term decisions by considering the impact on all their material stakeholders.

"The new Code supports investors' demands for remuneration to be aligned to the long-term success of the business and supports the use of discretion rather than relying on formulaic outcomes. Along with continued investor pressure, these changes should help to deliver changes in remuneration outcomes."

Ninian said he intended to monitor how the new provisions, particularly on the tenure of the chair, work in practice.