Setting the record straight: FRC debunks common misconceptions about Corporate Governance and Stewardship
The Financial Reporting Council ("FRC") has issued new guidance answering questions frequently asked of it on corporate governance, stewardship and the FRC's enforcement of the UK Corporate Governance Code and UK Stewardship Code.
Described as a 'mythbuster', the FRC's guidance provides a high-level overview of common misconceptions concerning both the UK Corporate Governance Code (which applies to all companies with a listing on the Premium Segment of the Main Market of the London Stock Exchange) and the UK Stewardship Code (an voluntary code designed for best-practice asset owners, managers and those that provide services to them).
The FRC looks at the:
- meaning of 'corporate governance' and 'stewardship' and how the two concepts interact;
- reporting obligations for large and small businesses; and
- powers that it has to enforce or encourage compliance with each of the codes.
The guidance stresses the roles that both directors and investors have to play in promoting good governance practices, through encouraging responsible long-term behaviours (including around ESG practices, and corporate reporting transparency and accountability).
The FRC is keen to highlight the ways in which the UK Corporate Governance Code and the UK Stewardship Code (the latter which currently has 254 signatories, including 179 asset managers) have been designed to operate. It confirms that both codes are based on principles rather than prescriptive rules, and both require a 'comply-or-explain' approach to be taken on adherence to the codes as part of company reporting. There is deliberately a certain degree of flexibility built into the codes and their applications to enable companies to develop their own, high-quality governance practices tailored for their individual circumstances. The FRC reminds us that compliance with the codes should not be seen as a 'box-ticking exercise'; rather, requiring a considered approach to corporate governance and investor management. The FRC is also keen to stress the role these codes have to play in promoting the consideration of environmental and social factors, which can have a bearing on the success of a company.
Whilst the FRC acknowledges that the codes do not give it powers to compel compliance nor to take enforcement or remedial action against directors or company stewards for any non-compliance, the FRC reminds us that it monitors compliance (by examining reporting from a sample of 100 FTSE 350 and small cap companies) and, where necessary, consults with individual entities on ways in which their reporting practices can be improved.
A copy of the FRC's 'mythbuster' can be found here.