Directors' know how: what you should know about the upcoming changes

26th April 2017

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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

FRC publishes Plan & Budget and Levies 2017/18

The Financial Reporting Council (FRC) has published its Plan & Budget and Levies 2017/18. Its priorities will include:

  • Comprehensively reviewing and updating the UK Corporate Governance Code and promoting its work on corporate culture;
  • Working with other regulators to help stakeholders seize the opportunities and addressing the challenges of the UK’s exit from the EU;
  • Enhancing the speed and effectiveness of its enforcement role;
  • Promoting clear and concise corporate reporting; and
  • Using its role as UK Competent Authority for audit regulation to drive improvements in the quality of audit.

With regards to the UK Corporate Governance Code, the FRC has proposed reform in four areas:

  • Reinvigorate the Companies Act's duty on directors to promote the success of the company by requiring companies to report more effectively on how they have discharged it. The FRC should have powers to test the quality of reporting on this and other aspects of governance;
  • Extend the role, remit and judgement of the remuneration committee to cover pay policies throughout the organisation;
  • Introducing corporate governance principles for large private companies so that they are accountable to their stakeholders and society; and
  • Extend the FRC's powers to enable it to investigate and prosecute all directors for financial reporting breaches and associated issues of integrity, rather than only accountants and actuaries.

McGregor-Smith Review publishes report on race in the workplace

The McGregor-Smith Review – Race in the Workplace – has been published. The review was commissioned by the Government, to assess issues faced by businesses in developing BME (black and minority ethnic) talent in the workplace.

The Review recommended, among other things, that:

  • Listed companies and businesses with more than 50 employees should publish a breakdown of employees by race, ideally by pay band, on their website and in the annual report;
  • The Government should legislate to ensure that workforce data broken down by race and pay band is published; and
  • Businesses with more than 50 employees should identify a board-level sponsor for all diversity issues, including race. The sponsor should then be held to account for the overall delivery of aspirational targets. To ensure this happens, Chairs, CEOs and CFOs should reference what steps they are taking to improve diversity in their statements in the annual report.

Responding to the Review, Margot James MP, Minister for Small Business, Consumers and Corporate Responsibility, stated that the Government believes legislation is not the right approach to tackle the issue. She noted that companies must already use the strategic report to document information about their employees, which can include the diversity of their workforce.

Nonetheless, Ms James has written to the chief executives of all FTSE 350 companies calling on them to take up key recommendations from the Review including:

  • Publishing a breakdown of their workforce by race and pay;
  • Setting aspirational targets; and
  • Nominating a board member to deliver on those targets.

ICSA revises guidance on terms of references for audit committees

ICSA: The Governance Institute has published its revised guidance on terms of references for audit committees. The revisions reflect the 2016 updates to the UK Corporate Governance Code and FRC Guidance on Audit Committees.

Changes to the model terms of reference for audit committees include:

  • Deleting the provision limiting the extension of appointments to the committee to two further periods of three years, following an initial appointment of up to three years, provided that members continue to be independent.
  • Adding a new recommendation stating that one member of the remuneration committee should sit on the audit committee, where possible.
  • Inserting a provision stating that notices, agendas and supporting papers can be sent in electronic form where recipients have agreed to receive documents in such a way.
  • Expanding the duties of the committee so that: 
    • With regards to financial reporting, it should review any other statements requiring board approval which contain financial information first, where to carry out a review prior to board approval would be practicable and consistent with any prompt reporting requirements under any law or regulation; and
    • With regards to narrative reporting, where the board seeks the committee’s advice on whether the content of the annual report and accounts is fair, balanced and understandable, and provides the information necessary for shareholders to assess the company's performance, business model and strategy, the committee should also advise the board on whether the annual report and accounts informs the board's statement in the annual report on these matters.
  • Clarifying that when the audit committee works and liaises with other board committees, it should take into account the impact of risk management and internal controls being delegated to different committees.

Tomorrow’s Company report calls on changes in the boardroom to tackle short-term attitudes

Tomorrow’s Company has published its report ‘Promoting long-term wealth: reshaping corporate governance’, urging radical change in the boardroom to restore public trust in business and tackle attitudes of short-termism.

The report, commissioned by the All-Party Parliamentary Corporate Governance Group, stressed that encouraging companies to deploy capital that creates sustainable wealth for shareholders and society will best combat low public trust, productivity and economic growth. It recommends:

  • Creating long-term capital trusts – A new tax-efficient investment trust structure that has a mandate to support UK economic growth by being an engaged stewardship investor in UK companies. This would create funds able to hold large and long-term stakes in UK companies.
  • Enabling shareholders in UK companies to designate a specific stake as a stewardship stake.
  • Expanding and strengthening the Stewardship Code – This would cover the role played by different actors throughout the investment chain including asset owners, investment consultants and companies, as well as asset managers.
  • Introducing stakeholder advisory panels for companies above a certain size – These would have a mandate to provide the board with the stakeholders’ view on long-term success, and challenge the board on the wider duties within Section 172.
  • Broadening the remit of the remuneration committee – To include the pay, incentives and conditions of all employees, rather than just executives, as well as the company’s wider strategy around talent, culture, diversity and succession. This would allow the board to focus on creating long-term value.
  • Clearing clutter from boardrooms – There should be a shift from a long list of provisions in the Governance Code with a ‘comply or explain’ requirement, towards a shorter list of principles with an ‘apply and explain’ requirement.

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