The UK’s Financial Reporting Council watchdog will publish on Monday its revised Governance Code, which aims at shifting the focus of the UK governance framework from being shareholder-centric to a broader stakeholder-oriented approach.
Speaking at the annual conference of the Institute of Chartered Secretaries and Administrators (ICSA) on Tuesday, Stephen Haddrill, the FRC’s CEO, said that the revision of the Code has considered whether business take sufficient account of stakeholder interest, including employees, customers and suppliers, as well as shareholders.
“The 2018 Code, which we will be publishing on July 16, reinforces the Act [section 172 of the Companies Act 2006] and stresses that boards should consider the way companies interact with their stakeholders,” Haddrill said.
He added: “We shouldn’t focus on shareholders alone; companies must consider the interest of other stakeholders. Directors need to understand the impact of the company on its employees, consumers and the environment and wider society.”
Section 172 prescribes directors’ duties to promote the success of the company, who should have regard for “the interests of the company’s employees”.
Also speaking at the event was Andrew Griffiths, Minister for Small Business, Consumers and Corporate Responsibility, who said that Section 172 is underpinned in that matter by the new Code.
Griffiths said that under the new Code companies should adopt at least one of the following three “robust employee engagement mechanisms”: an employee director appointed to the board from the workforce; a formal workforce advisory panel; or the representation of employee views by an independent director (a designated non-executive director).
Griffiths also said that new regulation on governance reporting requirements such as pay ratios for large companies (whether listed or not), completed its progress through Parliament on Monday night.The Companies (Miscellaneous Reporting) Regulations 2018 would enter into force on January 1 2019, and in practice means, Griffiths said, that new reporting on pay ratios and other matters will start to be seen in company reports from the start of 2020.
Haddrill noted the ongoing independent review of the own FRC’s internal organisation being conducted by Sir John Kingman, with a public consultation period closing on August 6.
He said that public expectations on all regulators have changed significantly as trust in business has declined.
“We shouldn’t focus on shareholders alone”
“The language of deregulation, prevalent over the recent years, has been overtaken by public calls for tougher regulation and indeed tougher regulators, and rightly so. The law should be applied,” he said.
He continued: “Those who enjoy its advantages, access to public equity, limited liability and an environment that respects free competition, trade and innovation, should feel held to account for operating fairly and in the interest of the society that confers those advantages.”
Haddrill suggested that if the FRC’s review powers were extended to challenge what companies say on their annual reports, it could cover the scrutiny of governance reporting matters.
“A comply or explain system would not be effective if the explanations are weak or misleading,” he said.
He also said that the new Code builds on the work of the Corporate Culture Coalition, a 2016 initiative under the auspices of the FRC, focus on board effectiveness.
Asked by Responsible Investor whether responsible tax is part of the culture of the Code, Haddrill said that the Code does not specifically talk about tax, however the issue is consistent with Section 172, and directors should be “thinking about paying what it is the right amount and not to get away with paying as little as possible”.
“Businesses benefit wider society by creating employment, also by contributing to the public purse,” he added.