The theme that came over loud and clear during the interview with Paul George, was the need for more clarity and useful information from companies. With the implementation of the EU’s non-financial reporting rules this year the FRC is looking to see greater explanation of companies’ impacts on society and the environment. With greater importance now attached to Section 172, which deals with directors’ responsibilities, of the UK’s Companies Act the FRC wants to see more detail on how directors have discharged their duties. With the help of its newly established Stakeholder Advisory Panel it wants to broaden its outreach. . And there is much to follow-up in the 270-plus responses the FRC received in its recently-completed consultation on the Corporate Governance Code. 

One area that sparked interest in the consultation was a greater emphasis on the responsibilities of remuneration committees. ‘There have been some challenges around our desire that remuneration committees have wider responsibilities for the oversight of remuneration policies throughout the organisation’, said George. ‘We were quite clear in saying that this was an oversight responsibility but some have interpreted that as encouraging remuneration committees to cross a threshold from being non-executive to executive’, he said. And this, along with strengthening independence around the chair of a company throughout their tenure and proposals on how to get the employee voice better heard in the boardroom have caused concern. 

Paul George also made it clear that the FRC also wants, via the implementation this year of European rules on social and environmental disclosure, ‘to see companies respond to that, particularly explaining their impact on society and the environment’. This is a theme. ‘More generally we are really looking for much more colour around how directors discharged their Section 172 [of the Companies Act] responsibilities’, he said. He would like to see boards using examples of major decisions that a board has taken during the year and to explain how they had regard to various stakeholders for the longer term, and the environment, for example, in taking those decisions. ‘We are also keen that boards better explain how they generate value and then explain how they take decisions on how that value is distributed amongst the various different stakeholders’. The FRC wants to know ‘what are the decisions and judgments around the extent to pay dividends, the extent to accelerate making good pension deficits, the decisions around investing in research and development and capital expenditure, for example. We think a better flavour of the company’s policies in regard to these matters would be really helpful to shareholders and to stakeholders’. 

The collapse of Carillion has focused minds. ‘Before the collapse’, George said, ‘we did publish a Financial Reporting Lab report on how investors would like to see better reporting in respect of risks and we are encouraging companies with their participation to do that’. George also urged companies to look at the interaction between the going-concern concept in the preparation of accounts, the role of the strategic report and the role of the viability statement and how all these different aspects are pulled together. 

He talked of how the FRC’s new mission was to focus on transparency and integrity in business and the importance of the newly established Stakeholder Advisory Panel so that the FRC could think more broadly about the impact of their work. He accepted that perhaps they could be criticised for focusing too much on responses and engagement with those who very closely involved in the company reporting and governance arena. So the intention is to broaden their outreach so that they see more clearly how business is contributing much more to society and enable the FRC to play their part in restoring trust in business. 

The position of IFRS in a post-Brexit world was also causing concern. While accepting that it was a matter for Government the FRC was playing its part. ‘So far as the extensive outreach that we have undertaken to date goes there is a clear preference that as far as companies listed on the main market and AIM are concerned we should have, or continue to have in the UK, an accounting framework based on international standards’, he said. ‘The question then arises: What type of international standards? International standards as set by the IASB? International standards as endorsed by the EU? Or international standards as endorsed by the UK?‘ he said. ‘So far as the FRC is concerned we believe that the way that the UK’s interests are best served so that we get the highest quality standards relevant to UK business and UK stakeholders is that we should have international standards endorsed by the UK. The question that then arises’, said George, ‘is what is the endorsement process and who should be involved in that, and we are actively engaged in that debate as we speak’. 

Corporate governance continues to evolve. One of the issues which emerged from the recent consultation on the corporate governance code was how far the mainstay of the Code, the principle of ‘comply or explain’ had become, in the view of some, ‘comply or else’. ‘I put this down to two things’, said George, ‘the role of proxy advisors and the shortening and sharpening of language that we have undertaken through the Code consultation’. The latter might have given the impression that there was less flexibility as a result. And that will be looked at in the finalising of the Code. As for proxy advisors George recognised that there was a changed geography. ‘I think you have to look at the role of passive funds’, he said. ‘I think you have to look at the increasing internationalisation of share registers in the UK and therefore are stewards able to [ask the right questions to] discharge their responsibility that society would like them to discharge in holding corporate boards to account’? As a result the FRC is to look, as part of the work on the Stewardship Code, into how the role of proxy advisors fits in with that. 

These are complex times for the FRC, with many issues to face. It is harder for a regulator to focus on changing the overall culture as opposed to producing short-term rules. It will be a hard road ahead to navigate.