A recent Report from the Department for Business, Energy and Industrial Strategy Committee contains a raft of proposals aimed at improving general corporate governance within UK companies. So what are the key proposals and how will they impact on UK companies?
Who will be affected?
Rather than reforming UK company law, the Committee is proposing that most of its recommendations are implemented through changes to the UK Corporate Governance Code (the Code). That Code applies to companies with a premium listing on the Main Market of the London Stock Exchange who are expected to follow the Code on a “comply or explain” basis. Other listed companies, such as those on AIM, often follow the Code on a voluntary basis but private companies typically do not comply with the Code as its provisions are less well suited to smaller, owner-managed businesses.
The key proposals
1. Directors’ duties
The Committee recommends improvements to the Code to ensure company directors are taking their duties seriously. This would be achieved through more specific and accurate reporting, supported by tougher enforcement via the Financial Reporting Council (FRC).
In particular, the Code would be amended to require narrative reporting on the section 172 duty (the duty to promote the success of the company), explaining precisely how the directors have considered each stakeholder interest and how this is reflected in the financial decisions made. A requirement for reports to be ‘accessible, narrative and bespoke’ should help to avoid boilerplate statements.
The FRC appears to be aligned with the Committee’s recommendations as they have previously stated that the existing regulatory framework is “fragmented and enforcement is not fully effective at present“. The FRC went on to say that they would be willing to accept “additional responsibility to sanction all directors“, when concerns are raised about financial reporting or corporate integrity. The Government appears to have taken them up on their offer.