UK seeks views on corporate governance, audit

The clock is ticking. It doesn't stop just because the economy has and because nothing very much has changed. But it's time to revisit corporate governance again. The UK Financial Reporting Council adopted its latest provisions two years ago, so it's time to crank up the consultation machinery to fine tune them. But the consultation follows several other initiatives that have not yet become policy, so this paper concerns in part what the consultation itself will not address. It won't look at board diversity – it has done that last year. It's also not seeking views on remuneration, subject of a different government inquiry. The FRC is seeking views on two interrelated themes:

• Corporations and boards: The 2010 UK Corporate Governance Code narrowed the scope of this iteration to concentrate on what boards do and how they are built. Some small issues have arisen in the implementation of it, and the FRC will take another look. More fundamentally, it wants to make a big revision to the notion of compliance. "The FRC also proposes to set out in the Preface to the Code the features that it regards as the characteristics of an informative explanation," it said. That means incorporating the themes of a paper it published in late February entitled: "What Constitutes an Explanation under 'Comply or Explain'?" It wants the code itself to help companies understand "what was expected of them when they choose to deviate from the provisions of the Code, and to provide shareholders with a benchmark against which to judge explanations".
• Audit: Boards will need to state in the annual report the reasons why they consider the report to be fair, balanced and understandable. The remit of the audit committee will be extended expressly to advise the board on this issue. More informative reporting by audit committees, including on the process for appointing the external auditor, will be encouraged. And the 350 largest companies will be expected to put the audit contract out to tender at least every 10 years.

In addition, the FRC is consulting separately about the Stewardship Code, which concerns the actions of shareholders and in particular institutional investors.

Source document: The overview page has links to the consultation paper and two appendices.