More Regulations: Just When You Thought It Was Safe to Come Out…

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The UK’s Financial Reporting Council (FRC) has recently published an updated version of the Combined Code on Corporate Governance in the UK. It will apply to companies with reporting periods commencing on or after 1st October 2014.

You can get an idea of its tone from a statement issued by FRC Chief Executive Stephen Haddrill:

The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation

Whilst not revolutionary it does contain some changes of emphasis which are likely to give directors pause for thought. Three in particular caught my eye:

Directors’ Risk Assessments

The first relates to a new requirement to robustly assess the main risks facing their business and explain how these risks are being managed or mitigated.” According to PWC:

The formal confirmation from the directors that they have carried out a robust assessment of the principal risks will significantly increase the focus on this area and raise the profile of the related disclosures in the annual report.

Well, that’s entirely consistent with the FRC’s aim to drive responsibility for risk management high up on boardroom agendas. In and of itself it does not increase personal liability for directors, provided they avail themselves of the generous safe harbour reporting regime here in the UK. But if something serious goes wrong (as it seems to have done at Tesco recently)  the new requirement will be yet another peg on which regulators and claimants may be able to hang allegations of failings.

Viability Statements

The second change is in a similar vein and is referred to by the FRC as a “viability statement”. The new requirement is for:

a statement from the directors explaining how they have assessed the prospects of the company (taking account of the company’s current position and principal risks), over what period they have done so and why they consider that period to be appropriate.

Whilst the FRC has left open the length of period which the directors’ statement should cover, they have said that they would expect this to be “significantly longer than 12 months.”

Given the ever-increasing pace at which things seem to happen (or at least get reported and analysed), especially in the world of larger companies with international footprints and public listings, it’s not hard to see how such a statement could suddenly be made to look horribly out of date and wide of the mark. This too could give ammunition to claimants and or regulators seeking to blame senior executives.

“Excessive” Remuneration

Finally, the changes to remuneration rules affecting directors also reflect the FRC’s relentless focus on the responsibility of the board to deliver “longer-term” performance. (These changes come on top of an overhaul of the whole remuneration regime for listed companies which was introduced just last year; see The Directors’’ Remuneration Report Regulations.)

The new Code emphasises the need to avoid “excessive pay (although I imagine there is still plenty of scope to argue about what constitutes excessive pay). For the first time the code now also makes reference to the need to withhold or recover performance-related pay where the required “performance” is not delivered.

So not only is there additional potential to get blamed when things go wrong but also the threat of having to return elements of pay. That reminds me of a blog I did a while back raising the possibility that, in some circumstances, directors might also be liable for the tax payable on their bonuses.

Although compliance with the Code is not mandatory it will operate  (in common with all its predecessors)  on a “comply or explain” basis. One can envisage that any but the best explanations as to why there has been no robust assessment of risk, nor any viability statement nor the steps needed to avoid excessive pay are likely to raise concerns with shareholders.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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