On 5 December 2017, the Financial Reporting Council (FRC) published its consultation on proposed revisions to the UK Corporate Governance Code.

As the FRC said in the introduction to the consultation, this has been a wide-ranging review. “One of the starting points for the review was the Cadbury Code, and a fundamental question was whether the aims of the first Code were still relevant. The growing demands of the corporate governance framework also led us to consider the balance between the Principles and Provisions.”

In February 2017, we published the first in a series of papers looking at ‘The Future of Governance’. This initial paper entitled ‘Untangling Corporate Governance’ foreshadowed this aspect of the consultation. According to the paper, “In its introduction to the original code, the Cadbury Committee...defined corporate governance as ‘the system by which companies are directed and controlled’...That relative modesty of ambition has long since been discarded. An informal definition of how we now think of corporate governance might be ‘everything that companies do’”.

The FRC’s aspiration – to encourage people to focus on the purpose of corporate governance and how it can be used to underpin the long-term health of the company, rather than as a compliance exercise – is entirely laudable. One of the challenges with the current Code is that there has, increasingly, been a tendency on the part of both investors and, especially, their advisers to regard the provisions of the Code as a set of boxes which must be ticked. This is to go against the whole purpose of the Code which is, through a ‘comply or explain’ model, to give companies the flexibility that they need to develop and grow in their own way while explaining any divergences from normal governance practice in the light of their own specific circumstances.

Apr-Jun 2018 Issue

ICSA: The Governance Institute