An Independent Body Should Administer UK Corporate Governance
The curious dual responsibility of Britain's corporate governance watchdog-cum-accounting-and-audit-regulator, the Financial Reporting Council (FRC), has been called out in a submission to the UK government's consultation on an independent review of the body.
The Institute of Directors (IOD), a business networking and lobby group that champions good corporate governance, has suggested hiving off the FRC's responsibility on this matter, leaving it to better focus on what it describes as its "core task" - improving company audits.
It's quite surprising that, as far as I know, nobody has suggested this publicly before now. But August is traditionally a good time to get media attention on those things that fall by the wayside otherwise.
Private conversations with senior business folk with opinions on the Kingman Review suggest that such a hiving off of the FRC's responsibilities is highly likely to be under consideration. You could even argue that it's a 'no-brainer' (and I do) but we will have to wait and see.
The review, led by Sir John Kingman, the chairman of Legal & General plc - which is the largest institutional investor in the UK - was set up in April by the UK government to assess the FRC’s governance, impact and powers to help ensure it is fit for the future. Set to be completed by the end of 2018, it said it aimed to make the FRC the "best in class for corporate governance and transparency, while helping it to fulfil its role of safeguarding the UK’s leading business environment."
"The UK has a strong reputation as a dependable place to do business but this needs to be continuously updated and it’s important to ensure all of our regulators continue to drive high standards...This review is part of the government’s Industrial Strategy aim of creating a business environment that ensures our regulators are fit for the future and our markets are working for consumers. The review will include a consultation, asking for views on the FRC’s role in the British economy" said UK Business Secretary Greg Clark at its launch.
In its submission to the Department for Business, Energy and Industrial Strategy (BEIS) on the review, the IOD proposes that the UK's governance and stewardship codes be administered by an independent body with close links to business and investors, "rather than simply being an 'add-on' to an accounting regulator."
It argues that the shaping of voluntary best practice for boards of directors, and the setting and enforcement of accounting standards are very different activities and should, therefore, be overseen by separate bodies.
"Corporate governance has been swallowed up within a regulator that now urgently needs to focus its energies on improving the legitimacy of statutory audit. The FRC has for many years done a good job acting as the keeper of the UK’s corporate governance code, but we feel its centralised decision-making structure is not conducive to the differing regulatory approaches needed for governance and stewardship on the one hand, and statutory audit on the other. There must be a clear distinction between being robust on audit quality, while continuing to nurture the UK’s much admired principles-based corporate governance regime" said Dr Roger Barker, Head of Corporate Governance at the IOD.
“With recent high-profile corporate failures we see there are legitimate concerns about the role of the accounting regulator. There are strong arguments for bolstering its investigative and enforcement powers over statutory audit. However, corporate governance and investor stewardship are qualitatively different areas of regulatory activity. They benefit from a much more flexible and collaborative approach" he added.
"It is unfortunate" said Dr Barker, "that the current remit of the regulator creates an unhelpful perception that corporate governance is simply there to supplement the accountancy profession, when if anything the reverse is true.”
As the IOD points out, " the UK Corporate Governance Code and the UK Stewardship Codes are both 'soft law' codes which aim to influence corporate behaviours through best practices rather than mandatory regulation. This contrasts with the oversight of statutory audit where a more robust regulatory approach is needed" it added.
Or in other words, there is a time when you have to talk about more than 'culture' for effective regulation.
In 2013 I interviewed the FRC's CEO Stephen Haddrill. It was a rare interview at the time as it blended personal and professional in a look back at his career for a series of interviews for the Financial Times featuring CEOs, CFOs and Chairs, and he had never given such an interview. But his views on regulation were made clear then, and there is nothing to suggest that they have changed.
I would also argue that there is a fundamental problem with trying to achieve better corporate governance where there is endemic conflict of interest in a particular sphere - such as accounting and audit, with the reality of monopoly among the BIg Four audit firms. Why would you want to couple that with 'best practice' on the corporate governance of the Britain's business? It makes little sense.
The full submission from the IOD on the consultation can be viewed here.
A last point - this is all happening at a time when UK business, while trying to remain resilient, is already weeping and crippled by Brexit uncertainty. If there is commitment as suggested by the UK Business Secretary when he said this review was "part of the government’s Industrial Strategy aim of creating a business environment that ensures our regulators are fit for the future and our markets are working for consumers" then the government response on the consultation must be crystal clear on direction.
Note 08/08/18 As the IOD has not acknowledged this post, I thought it best to alter the headline and remove their Twitter handle. Nothing else has been altered. Thank you for reading and do look at my latest Governance Watch, which takes this argument a step further.