FRC moves to expand enforcement powers

Having launched new governance principles for large private companies, listed businesses and most recently asset managers and owners, all of which come into effect this year, the Financial Reporting Council has also announced a major shake-up of its own remit.

With the first reports under both the Wates Principles and the UK Corporate Governance Code due to be published in 2020, the FRC looks set to expand its enforcement powers and speed up its investigations. The move is designed to ensure that the FRC fulfils its enhanced stated purpose of setting high standards of corporate governance and holding to account those responsible for meeting them. It should be welcomed.

This move is of course part of the FRC’s transition into a new regulatory body with greater powers, as recommended by John Kingman in his recent review.

Corporate collapses such as Carillion and Thomas Cook had led to accusations that directors were asleep at the wheel. As a result, it became clear that more needed to be done to enforce governance and stewardship mechanisms that would deliver viable, sustainable businesses. The FRC’s changes to its governance codes represent the first step in this direction but it remains to be seen how companies will respond.

Those businesses to which either the Wates Principles or the UK Corporate Governance Code apply will be required to report on their governance arrangements, to evidence good practice and show how this contributes to long-term sustainable success.

Underpinning these new requirements is the Stewardship Code 2020 which came into force on the 1st of January. Aimed at investors, the 2020 Stewardship Code is a voluntary code that asset owners, managers and service providers can sign up to.

As with the Wates Principles and the UK Corporate Governance Code, the Stewardship Code re-examines best practice, defining stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.” The code also places a requirement on signatories to consider environmental, social and governance issues. It asks those signing up to define the purpose of their organisations, along with their investment beliefs, strategy and culture and to show how they exercise stewardship.

In the UK, asset managers are required to report on whether or not they apply the Stewardship Code. Signatories to the code will need to demonstrate how its principles are applied.

All of the changes introduced over the last two years are welcome. The focus on creating sustainable businesses that take account of stakeholders as well as shareholders chimes with much of the international discussions we have heard recently about the future of business and indeed capitalism. Ensuring that corporate cultures are established to promote integrity and core values, while also aligning with business strategy, is also vital.

How companies and investors choose to report on these new requirements will be indicative of the priority being given to these new principles. The FRC’s stated intention to evolve into a tougher regulatory body with wider enforcement powers may focus the mind, only time will tell. From our work measuring and assessing the impact of companies on their different stakeholder groups, we know that embedding the right practices and procedure creates a virtuous circle and that progress in this area can be monitored and improved over time. To find out more about our methodology visit our website or contact us.