Initial thoughts on potential changes to the UK Corporate Governance Code
July 26, 2023
Recently, the Financial Reporting Council (“FRC”) published a consultation paper asking for detailed responses as to how the UK Corporate Governance Code (“the Code”) could be updated to become part of a wider framework of measures that will improve accountability, build trust and support investment and stewardship decisions in the UK.
Although the main driver for the consultation was issues around Audit reporting, the FRC have taken the opportunity to also look at and require comment on changes to the principles around remuneration.
As always, MM&K will be submitting a formal response to the FRC (both directly and via our involvement in industry groups such as the QCA).
However, in the meantime, here are three early observations about potential changes.
- The use of the term “comply”
Whilst we are very supportive of the concept of a “comply or explain” approach over a “rules based” approach to governance, we would observe that the word “comply” brings with it the concept that something is either correct (i.e. one has complied) or it is wrong (in that an explanation is required).
Therefore, in order for the FRC to bring about the change in attitude to reporting it desires, this phrasing could be changed to “apply and explain” – this more positive phraseology highlights that both the application of the principles and an explanation around how this relates to the business are at the heart of good corporate governance.
- Clear messaging and reaching the right audience
A general theme in discussions around governance reporting is that many of the messages get lost in the wider “jumble” of words in the Financial Statements – with many organisations seeming to take the approach that the more words it uses, the better its reporting must be.
However, if there was a maximum limit to the number of words that could be used for reporting governance in the Financial Statements, companies would really have to think hard about what messages they wants to give people and the words they choose to use to do that.
A suitably calculated maximum word count – but with no reduction in the number of matters to be reported, could be a simple way of focusing businesses to create clearer documents with more impact.
Alternatively, if such an approach was considered a step to far, an intermediate step could at least be the production of separate reports for (i) financial statements (ii) strategy sustainability, (iii) remuneration and (iv) governance; each with an executive summary.
- Linking remuneration to overall corporate performance
Interestingly, the proposed changes around remuneration are meant to encourage a greater connection between pay and performance – with structures in place which are targeted to the needs of the company and not just benchmarked against what the majority of the market is doing.
Given that such an approach has been at the heart of MM&K’s advice since our creation in the 1970’s, we are delighted that this is being recognised by the market and we are hopeful that, if this is fully embraced by the market, companies will find it easier to put in place remuneration policies which will focus on helping meet their growth ambitions.
Should you want someone to help you explore your thinking on this issue, please contact Stuart James in the first instance.