In February 2017, the Financial Reporting Council ('FRC') announced a fundamental review of the UK Corporate Governance Code. It will then ask for consultation on the proposed changes later in the year.
Following the disastrous corporate governance failings of British Home Stores (BHS) and Sports Direct, the UK Corporate Governance Code ('the Code') has come under increased scrutiny. In addition to the FRCs review, the Business, Energy and Industrial Strategy Committee has recently released a report on its own inquiry into the Code.
It has been 25 years since the Cadbury Report ushered in the UK’s modern framework for corporate governance. Although the UK is seen by the international community as having a robust corporate governance regime, the commercial world has changed considerably. New advances in technology, business structures, and increased stakeholder expectations mean parts of the Code need updating.
Effect on privately owned companies
Although the majority of the reforms suggested by the Business, Energy and Industrial Strategy Committee Green Paper ('the Green Paper') relate to public listed companies, there have been several recommendations in relation to privately owned companies that may well lead to binding regulations.
The Green Paper asked a number of questions that related to the Code's application to private businesses and sought support of the options set out therein. Some of these were:
- Extending application of the UK Corporate Governance Code and the comply and explain principle to large private businesses;
- Inviting the FRC or a business organisation, such as the Institute of Directors, to develop a separate governance code tailored for the largest privately-held businesses;
- Segmented application of a code differentiated on the business's size, nature and economic significance; and
- Basing non-financial reporting requirements on the size of the business rather than its legal form.
Although it is widely accepted that a code of governance will not be appropriate for the smallest of companies, it has not yet been decided where to draw the line. It is thought that the factors to be taken into account will relate to a company's size, including consideration of the number of shareholders and directors, size of the workforce and/or the size of responsibilities, which will be more appropriate than a purely financial measure.
It remains to be seen whether any of these suggestions will be put in place following the FRC's review this year. However, as can be seen from the select few options listed above, regulations could be introduced which will have an impact on all businesses, the extent of which depending on its size rather than a blanket application affecting only the largest of private businesses.
The Green Paper does point out that with Brexit on the horizon, the last thing companies need is harsh regulatory change. However, it makes clear that the current Code does have certain failings and improvements are required to ensure companies are engaging with the public in an open, honest, and consistent manner. The overall aim of the Code is to ingrain the values and behaviours of excellent corporate governance permanently into the culture of British business and it is therefore likely that whatever the outcome of the General Election and Brexit, British companies will see some regulatory change in the near future.