Mandatory code not wanted, says FRC

The UK’s financial reporting regulator has said there is little appetite for enforceable corporate governance rules based on a first glance at submissions received in its review of guidelines.

The Financial Reporting Council (FRC) said its initial feedback has shown little support for a compulsory combined corporate governance code, with submissions favouring the ‘flexibility’ in the current system.

The news is likely to bring a sigh of relief to some who feared a heavy-handed response in the wake of the global financial crisis.

The FRC said it has received more than 100 submissions, which is on par with previous reviews, with few showing great interest in making a new code ­ or parts of it ­ mandatory.

The council’s head of corporate governance, Chris Hodge, said he has seen little support for making the code mandatory but added that he was still assessing the submissions.

‘The feedback we are getting is saying the flexibility provided by the [present] code is desirable and there is nothing we are picking up to say that it be changed,’ he said.

‘We are open to making more substantial changes ­ but whether we will need to make them, we
have to come to some conclusion about that.’

He added that any attempt to make the code mandatory would need to be backed by the government.

The comments will disappoint some groups who suggested the current code be tightened. ACCA had called for an investigation about whether parts of the code should be mandatory. In its submission, it said UK corporate governance regulation was so light touch ‘as to have very little impact at all’.

‘A project should be instigated … to identify which of the discretionary provisions of the code, some possibly after amendment, should be made mandatory,’ it said.

In contrast, the CIMA chief executive, Charles Tilley, said he was happy with the code in its current form, describing it as ‘highly respected’.

He believes, however, that the FRC should focus not on its review of the code, but on educating businesses about real-world corporate governance failures. ‘There is a danger of a tick-box environment arising,’ he said.

‘If you are promoting examples of where things have been done really well and where things have been done really badly, you are at least getting companies to think about things they may not have thought about.’

At present the FRC enforces the ‘comply or explain’ rule where boards either adopt the corporate governance code in full or provide an explanation of their actions to shareholders. The rule was adopted in 1992 and has been included in all subsequent revisions of the code to the present day.

The FRC’s review will feed into the Treasury’s Walker review into corporate governance. The new code is expected to come into effect next year.