UK company directors face a tougher conduct regime

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Regulators on Wednesday are to propose an overhaul of the UK’s corporate governance code aimed at increasing the accountability of company boards for accuracy of accounts and strengthening directors’ accountability for misconduct.

The planned code reviews by the Financial Reporting Council follow a government consultation in 2021 on a retooling of the UK’s audit and corporate governance regimes after scandals at firms including retailer BHS, outsourcer Carillion and chain of cafes Patisserie Valerie.

After pressure from companies, ministers decided not to adopt some controversial changes through long-awaited legislation.

Instead, they’ve opted for a more “business friendly” approach, with some changes implemented through an overhaul of the corporate governance code.

These include a requirement, based on the US Sarbanes-Oxley Act passed in 2002 following the Enron scandal, for directors to declare that their companies’ internal controls have been effective.

The controls are intended to ensure that companies are able to produce reliable financial statements and comply with relevant laws.

Under the revised corporate governance code, directors are required to disclose “material weaknesses or deficiencies” in these controls.

The code applies to companies with a premium London listing and board directors can choose not to comply provided they explain their reasons.

David Styles, director of corporate governance and stewardship at the FRC, said the inclusion of internal control rules in the code rather than legislation “makes clear the board’s responsibility for this issue, but reflects the need for flexibility, proportionality and consideration of the particular circumstances of individual companies”. .

The code review proposals, which will be open for public consultation until mid-September, also include plans to strengthen corporate reporting on clawback arrangements that impact directors’ compensation in the event of misconduct or other serious shortcomings.

The changes would require companies to include these provisions in directors’ employment contracts.

Companies should disclose in their annual reports the “minimum circumstances” under which these provisions could be triggered and whether they have been used in the most recent financial year.

The code changes would also place additional responsibilities on boards and audit committees for reporting on environmental, social and governance issues.

Companies would be required to have an audit and assurance policy in place addressing whether and how they seek external assurance on their internal controls or environmental, social and governance metrics published in annual reports.

The government pledged in the Queen’s Speech last year to publish a draft law on wider reforms, including the creation of an accounting regulator, during the current parliamentary session.

Sir Jon Thompson, outgoing chief executive of the FRC, said the proposed changes to the code were “another step” towards restoring confidence in audit and corporate governance pending legislation.

Asked whether the government still plans to publish any bills during the current parliamentary session, a spokesperson said: “The government remains committed to driving significant improvements in audit and corporate governance in the UK, in line with the ambitious plans defined last year. The reform is underway and we will legislate when parliamentary times allow”.