UK company directors face tougher conduct regime

Regulators will on Wednesday propose an overhaul of the UK corporate governance code aimed at increasing company boards’ responsibility for accurate accounts and strengthening directors’ accountability for misconduct. 

The planned revisions to the code by the Financial Reporting Council follow a government consultation in 2021 on a shake-up of the UK audit and corporate governance regimes after scandals at companies including retailer BHS, outsourcer Carillion and café chain Patisserie Valerie. 

After lobbying from companies, ministers decided against adopting some contentious changes through long-awaited legislation.

Instead, they opted for a more “business friendly” approach, with certain changes implemented through an overhaul of the corporate governance code. 

These include a requirement, based on the US Sarbanes-Oxley act passed in 2002 following the Enron scandal, for directors to make a declaration that their companies’ internal controls have been effective.

The controls are meant to ensure companies are in a position to produce reliable financial reporting as well as comply with relevant laws.

Under the revised corporate governance code, directors would be expected to disclose “material weaknesses or failures” in these controls. 

The code applies to companies with a premium London listing and board directors can choose not to comply so long as they explain their reasons. 

David Styles, FRC director of corporate governance and stewardship, said including internal controls rules in the code rather than legislation “makes clear the board’s accountability for this issue, yet 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 to public consultation until mid-September, also include plans to strengthen company reporting on clawback arrangements affecting directors’ pay in the event of misconduct or other serious failings.

The changes would place an expectation on companies to include such provisions in directors’ employment contracts. 

Companies would be expected to disclose in annual reports the “minimum circumstances” in which these provisions could be triggered and whether they have been used in the most recent financial year. 

The changes to the code would also impose additional responsibilities on boards and audit committees relating to reporting about environmental, social and governance issues.

Companies would be required to have an audit and assurance policy dealing with whether and how they seek external assurance over their internal controls or the environmental, social and governance metrics published in annual reports. 

The government pledged in last year’s Queen’s speech to publish draft legislation on wider reforms, including creating an accounting regulator, during the current parliamentary session.

Sir Jon Thompson, outgoing chief executive of the FRC, said the proposed changes to the code were “another step” towards restoring trust in audit and corporate governance pending the legislation.

Asked whether the government still expects to publish draft legislation during the current parliamentary session, a spokesperson said: “The government remains committed to driving significant improvements to audit and corporate governance in the UK, in line with the ambitious plans set out last year. Reform is under way and we will legislate when parliamentary time allows.”