The impact can be wide ranging, especially in cases where the companies service a long supply chain and provide a significant amount of employment for their region. This can result in a ripple effect that has adverse impacts far beyond the organisation itself.
It can also significantly damage the trust placed in big business and company boards, amongst the public and society in general.
It is for this reason that current proposals to strengthen the UK Corporate Governance Code (“the Code”) isn’t just a consultation to be pored over by accountancy anoraks.
Policy makers are aiming to restore trust in the processes that ensure the organisations we all rely on for employment, essential goods and services manage and report risk in a way that enables them to continue to operate for the good of us all.
The Code is mandatory for all companies with a premium listing on the London Stock Exchange, regardless of where the they are incorporated. However, many large companies outside this criteria opt to apply the Code as it is seen as best practice and is viewed as the gold standard for stakeholders. A reduced version of the Code, known as the Wates Corporate Governance Principles, is mandatory for the largest UK privately-owned businesses.
In its first attempt to revise the code in more than five years, the proposals by the Financial Reporting Council (“FRC”) have been described as a ‘major overhaul’, but what exactly are they?
Among the key changes it has put forward is to set out a revised framework of prudent and effective controls to provide a stronger basis for reporting on, and evidencing their effectiveness.
The FRC also wants to see improvement in the function of ‘comply-or-explain’; if there is an area in which companies cannot meet the required standard, they must clearly set out why and what steps they are taking to address the issue moving forward.
Upon implementation of the code it is crucial that companies report on what is actually important and specific to them and their stakeholders. It’s not about creating a template that can be copied and pasted from one business to the next.
Revisions, the FRC says, are also needed to reflect the responsibilities of the board and audit committee for sustainability and Environmental, Social and Governance (“ESG”) reporting, and associated assurance in accordance with a company's audit and assurance policy.
Put simply, strong ESG practices are frankly good for business. Increasingly, customers, whether consumers or other companies, are driven by a desire to support organisations that demonstrate a positive impact on the environment and wider society - and this is influencing their purchasing decisions.
It’s not just about tackling climate change or promoting environmental sustainability, ESG covers an incredibly wide remit from workplace safety and inclusion to board diversity, executive pay and beyond.
The proposals from the FRC also urge companies to take proactive measures that will enhance gender and ethnic representation at senior levels.
Investors too want to direct capital towards businesses that have strong ESG credentials, in turn to build trust among their own stakeholders. As such, ESG can have a material financial impact on businesses.
Meanwhile, the code will also attempt to strengthen reporting on “malus and clawback” arrangements in a bid to provide better reassurance to stakeholders against rewards for failure.
At the end of the day, it’s about communication and helping each organisation's stakeholders, be they investors, customers or the community, understand the strategy of the business, how it has performed and what decision making and processes went towards making that happen.
From the perspective of business it is compelling that there is a large body of evidence that good corporate governance is inextricably linked to strong financial performance.
We all want to create the conditions that allow companies to flourish, grow, create employment, spark new businesses and attract investors.
Reporting and good corporate governance has an important role to play in that.
From a Northern Ireland perspective, the economic landscape of today is virtually unrecognisable to that of 20 years ago.
The reasons for that are plentiful but include the increasing diversity of our indigenous businesses, an upsurge in the number of foreign direct investors, and the continued development of new skills. This changed environment has come about from increasing the attractiveness of the region and crucially, building trust that this is a good place to start or invest in a business.
In the same way, revisions to the UK Corporate Governance Code are, at heart, about instilling increased levels of trust that businesses here are not only transparent, but are robust, and resilient to cope with change, increasing their standing in the eyes of local stakeholders and international onlookers. The Institute of Chartered Accountants in England and Wales described the planned reforms as “an important step in strengthening trust and confidence in UK business”.
The FRC’s consultation remains open for comment until 13 September and it is important to stress that the changes remain only proposals at this stage so nothing is set in stone as yet. That said, the final shape of the reforms will, in the view of most informed commentators, be unlikely to stray too far from what has been put forward.
With the plans to apply the new Code to all reporting from the beginning of 2025, now is the time to put the plans in place to ensure you’re ready to comply when the changes come into effect.