Governance Watch - Issue 23

By Dina Medland in London

Far-reaching revisions

The UK’s corporate governance watchdog, the Financial Reporting Council (FRC) on December 5th revealed its proposals for a revised Corporate Governance Code and as promised, it is “shorter and sharper.” I covered the release in my blog Board Talk with the headline UK Looks To The Future With New Corporate Governance Code.

The FRC’s emphasis on remuneration caught the attention of the mainstream business media headlines straight away. UK executives’ bonus shares face five-year lock-in period read the headline in the Financial Times.

“Executives at UK-listed companies would be required to hold on to bonuses paid as shares for at least five years under far-reaching revisions to Britain’s corporate governance code aimed at restoring public trust in business. The proposals also call on company boards to consider ethnic and social diversity when choosing their members and tighten the definition of an independent chairman to exclude those who have served more than nine years on the board” said the FT.

Overhaul of corporate code backtracks on May’s pledge to workers read The Guardian’s headline, with the sub-heading: ‘Vow to put workers on boards made during Tory leadership race appears to have been abandoned by Financial Reporting Council.’ The piece went on to say: “A consultation published by the FRC includes all three options – to assign a non-executive director to represent employees, to create an employee advisory council or to nominate a director from the workforce. While it does not list other options, it means that the City corporate code will include a provision for employees’ voices to be heard in the boardroom.”

‘“Shorter, sharper” corporate governance code welcomed as step to restore publics trust in business read the City AM headline, saying the proposals had been welcomed by “leading HR and governance bodies.” Other media coverage included these headlines: FRC to extend UK corporate governance code beyond FTSE350 from Accountancy Live, focusing on the plans to include large private companies as well.

Sky News (which will eventually be owned by Walt Disney Co after the clearance of regulatory hurdles according to news yesterday) had a leaked story two days earlier on the FRC’s proposed revisions. Its headline was: FTSE chiefs to be forced to take account of average worker pay.

“Boards will have to show how the pay of bosses and workers is aligned under new rules to be proposed this week, Sky News learns” read the sub-heading.

When it comes to corporate governance, the language used by the business media in headlines can be an interesting reflection of wider business and public concerns. The language of coercion (eg ‘forced to take into account) rarely goes down well in business circles. The same is true of the public when it comes to the scent of betrayal, eg ‘vows’, ‘abandoned’ and ‘backtracks.’ Yet the media seems to agree that the purpose of revising the corporate governance Code is, as the FRC states, to restore trust in business. Also, it has been 25 years since Cadbury.

It is also true that journalists are overworked and always on deadline, and that official embargoed press releases are rarely considered likely to contain anything earth-shattering. They are, therefore, read rapidly for salient points and translated into stories in a bid to deliver accurate copy swiftly.

It is not surprising then, that once the FRC’s proposed revisions to the UK corporate governance code had been digested, the FT ran a hard-hitting story six days later headlined UK corporate governance changes to hit dozens of chairmen. The subheading read: ‘Reforms to improve accountability to affect 67 of Britain’s largest listed companies.’

The reason? Because the proposed rules “state for the first time that chairmen should step down from their role after nine years on the board. This includes time spent in previous non-executive director roles” as stated in the FT. Take this along with diversity re-defined as “diversity of gender, social and ethnic backgrounds, cognitive and personal strengths” that are to be taken into account for appointments as well as more transparent succession planning, and you have quite a potent cocktail to bring about potential change. 

The buzz around the need for true diversity is getting louder, and it’s coming from all directions from those who help to govern the country. Here’s the Financial Conduct Authority (FCA) speaking out: UK watchdog says financial scandals tied to poor diversity; subheading ‘Regulator believes the scale of bad behaviour at City firms has been made worse by a shortfall in the number of women and ethnic minorities.’

Note that the FRC’s proposals (Provision 18) also say: “All directors should be subject to annual re-election”, opening the door to ending the possibility that those ‘pale, male and stale’ directors asleep on the job remain in it, undisturbed.

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