Regulators will propose a revision to the UK corporate governance code on Wednesday with the aim of increasing the liability of company boards for accurate accounts and strengthening the liability of directors for misconduct.
Planned reviews of the code by the Financial Reporting Council follow a government consultation in 2021 on a shake-up of the UK’s audit and corporate governance regimes after scandals at companies including retailer BHS, subcontractor Carillion and the Patisserie Valerie chain of cafes.
After lobbying by companies, ministers decided not to adopt some controversial changes through long-awaited legislation.
Instead, they opted for a more “business-friendly” approach, with certain changes implemented through a review of the corporate governance code.
These include a requirement, based on the US Sarbanes-Oxley law passed in 2002 after the Enron scandal, for directors to make a statement that their companies’ internal controls have been effective.
The controls are intended to ensure that companies are in a position to generate reliable financial reports and to comply with relevant laws.
Under the revised corporate governance code, directors are expected to disclose “material weaknesses or failures” in these controls.
The code applies to companies with a premium listing in London and directors on the board can choose not to comply as long as they explain their reasons.
David Styles, the FRC’s director of corporate governance and administration, said that including 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 proposed revisions to the code, which will be open for public consultation until mid-September, also include plans to strengthen company reporting on recovery arrangements that affect directors’ pay in the event of misconduct or other serious failures.
The changes would create an expectation that companies include such provisions in directors’ employment contracts.
Companies are expected to disclose in annual reports the “minimum circumstances” under which these provisions could be activated and whether they have been used in the most recent fiscal year.
The changes to the code would also place additional responsibilities on audit boards and committees in relation to reporting on environmental, social and governance issues.
Companies would be required to have an audit and assurance policy that addresses whether and how they seek external assurance on their internal controls or environmental, social and governance metrics published in annual reports.
The government committed in the Queen’s speech last year to publish a bill on broader reforms, including the creation of an accounting regulator, during the current parliamentary session.
Sir Jon Thompson, the 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 if the government still hopes to publish a bill 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 ambitious plans laid out last year. The reform is underway and we will legislate when parliamentary time allows it”.