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

22nd September 2016

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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 Conference – Culture to Capital: aligning corporate behaviour with long term performance

On 20 September 2016, the FRC held its 2016 conference entitled ‘Culture to Capital: aligning corporate behaviour with long term performance'.

The conference explored the relationship between corporate culture and value creation, and the link to good governance by companies and effective stewardship by investors.

Sir Win Bischoff, Chairman of the FRC, opened the conference by affirming that companies must establish a culture that fosters trust and encourages good behaviour at all levels in a company’s organisation, underlining the key role boards have in establishing and delivering the right behaviours. Indeed, he emphasised that importance of boards taking decisions that are consistent with the values and strategy it promotes.

Panellists covered a broad range of subjects related to corporate culture, highlighting that:

  • Companies should engage both asset managers and non-executive directors in the company’s strategy to encourage long-term investment rather than short-termism and immediate profits;
  • On the subject of executive remuneration, CEOs can send powerful messages to employees about the kind of culture they are trying to promote - for example by capping their own pay or introducing a profit-sharing scheme;
  • A performance-driven and values-led approach has the best chance of fostering a positive corporate culture; performance indicators should always be measured against the values of the organisation;
  • The desired corporate culture must then be adhered to at all times; any function within the company that is not supportive of the desired culture should be closed down to discourage the spread of bad behaviour;
  • Good corporate culture can provide companies a competitive advantage over rivals;
  • Both executive and non-executive directors should frequently visit their businesses, to better inform their views and decisions regarding their organisation’s culture; and
  • The biggest challenge facing companies was finding the right balance between profits, standards and behaviour to deliver long-term value for shareholders.

Although panellists were positive about government interest in corporate culture, it was stressed that subsequent progress should be business-led and not through further regulatory measures.

European Commission issues call to speed up implementation of Capital Markets Union reforms

The European Commission published a communication – sent to the other EU institutions – urging swift action to accelerate the implementation of Capital Markets Union (CMU) reforms in light of the current economic and political environment.

The CMU is one of the European Commission’s flagship projects and seeks to increase and diversify the number of funding sources available to EU businesses, in order to stimulate investment and facilitate growth.

The communication outlines its plans for finalising the first wave of CMU initiatives, accelerating the delivery of the next wave of CMU measures and its workplan for developing the next set of priorities for completing the CMU.

Specifically, the European Commission intends to:

  • Do its utmost to support the European Council and European Parliament in finding an agreement on the modernisation of the Prospectus Rules, helping generate more and less costly financing opportunities for companies by the end of 2016. Our working group on the Prospectus Regulation continues to develop the Quoted Companies Alliance amendment proposals and has recently met with the FCA and ESMA to ensure that the prospectus rules are fit-for-purpose and help small and mid-size quoted companies to better access equity markets and grow.
  • Present a follow-up in response to its call for evidence on the cumulative impact of financial reform, as part of its Better Regulation agenda. Areas identified in the call for evidence include addressing impediments to the flow of finance to the economy, enhancing the proportionality in the regulatory framework to better balance financial stability and growth objectives, and reducing unnecessary regulatory burdens. We responded to the call for evidence in January 2016.
  • As part of the review of regulatory barriers to SME admission on public markets and SME Growth Markets, hold two workshops in October and December 2016. Our Chief Executive, Tim Ward, will be a speaker at the October workshop, covering developing equity markets for SMEs.

Institute of Directors’ 2016 Good Governance Report

The Institute of Directors, jointly with Cass Business School, has published the 2016 Good Governance Report as part of its effort to encourage the study of, and stimulate public debate in the importance of, good corporate governance within the UK business community.

The report combines traditional governance indicators with a measure of the quality of corporate governance as perceived by stakeholders to create an index ranking FTSE 100 companies on their corporate governance performance.

The results of the study suggest that different components of corporate governance have different impacts on companies’ perceptions of it. For example, measures of Board Effectiveness have little effect on the perceived quality of corporate governance of a company. Two reasons are given for this: not only is Board Effectiveness difficult to measure effectively, but simple compliance with the UK Corporate Governance Code is also not sufficient to receive a high corporate governance score as perceived by stakeholders.

Measures of the quality of Audit and Risk/External Accountability are the most important determinant of the perception of good corporate governance, followed by Shareholder Relations, Remuneration and Reward, and Stakeholder Relations respectively.

Furthermore, the report confirms that there continues to be no consensus on the definition of good governance across stakeholders. For instance, while all stakeholders value the importance of Audit and Risk/External Accountability, customers also care about Shareholder Relations, while investors and analysts also value Stakeholder Relations.

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