FRC dilutes long-awaited UK corporate governance reforms

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The UK accounting watchdog has dropped most of its proposed changes to the corporate governance code, in a move it says protects UK “competitiveness”. 

The Financial Reporting Council’s chief executive Richard Moriarty said on Tuesday he would abandon “over half” of the 18 changes the regulator had proposed in a consultation in May.

He said the decision reflected the FRC’s role in “supporting UK economic growth and competitiveness”. He added that the watchdog was “conscious” of a wider debate about business reporting requirements and burdens across the economy. 

The changes to the FRC’s plans are the latest in a series of delays and rowbacks in a years-long process to overhaul corporate governance rules following a series of high-profile corporate failures, including the collapse of government contractor Carillion, retailer BHS and café chain Patisserie Valerie. 

Moriarty said the FRC would drop proposals to give audit committees additional responsibilities relating to reporting on environmental, social and governance issues.

It will also scrap changes to diversity reporting and proposals that would have required audit committee chairs to regularly engage with large shareholders.

Michael Izza, chief executive of the ICAEW accountants’ professional body, said: “Carillion’s collapse almost six years ago marked a watershed moment for UK audit and corporate governance, but it appears that the government’s promise of comprehensive reform will remain unfulfilled due to a lack of political will.”

The FRC said some of the proposals were being dropped as a result of business secretary Kemi Badenoch’s decision last month to shelve legislation that would have tightened corporate governance rules for large companies.

The government has depicted Badenoch’s decision as part of a drive “to reduce the burden of red tape”. The move followed lobbying by the financial services industry over the cost of new corporate reporting rules. Such rules would have included a requirement for large companies to publish annual statements explaining how they ensure their resilience over the short, medium and long term.

Ministers have also delayed separate, primary legislation to create a new, more powerful accounting and boardroom regulator by omitting it from the King’s Speech on Tuesday, which laid out the government’s legislative agenda for the next year. 

The FRC said it would publish an updated version of the corporate governance code in January 2024. 

The updated code would still include new requirements for companies to report on their internal controls but would be part of a “more targeted and proportionate” package of reforms, the regulator said. 

The FRC added that the implementation of the new rules on internal controls would be delayed and would ensure “the UK approach clearly differentiates from the much more intrusive approach adopted in the US”. The code applies only to companies with a premium listing on the London Stock Exchange and companies can ignore its requirements as long as they explain why. 

Moriarty said respondents to the FRC’s consultation had warned that guidance issued under the corporate governance code could have “unintended effects” on businesses and investors in the UK. 

He added: “The FRC will continue to utilise its current regulatory toolkit to support UK businesses to thrive, balancing the FRC’s public interest remit while promoting UK corporate growth and competitiveness in global capital markets.”

City minister Andrew Griffith said the FRC’s changes were “pragmatic and proportionate,” adding: “The UK rightly enjoys a strong reputation for high governance standards but it’s important that we don’t burden our best and brightest companies to the extent that it’s not a level playing field versus our international competitors.”