UK ditches much of corporate governance revamp to focus on being competitive
London, November 7, 2023
Britain has ditched much of a planned new code of practice for companies drawn up after a string of high-profile business failures, amid concerns tougher rules might hit competitiveness.
Three government-backed reviews recommended beefing up auditing and corporate governance standards after companies such as builder Carillion, retailer BHS and cafe chain Patisserie Valerie collapsed, leading to thousands of job losses.
But the Financial Reporting Council (FRC) watchdog has faced a backlash in London's financial centre, where critics argue that toughening up its corporate governance code would knock the hub's post-Brexit competitiveness as it vies with New York for listings.
The FRC held a public consultation on the planned changes to its Corporate Governance Code, a form of 'soft law' that companies apply on a 'comply or explain' basis.
The Capital Markets Industry Taskforce, chaired by LSE CEO Julia Hoggett, has described the code as "comply or else", meaning it was a straitjacket.
The FRC said on Tuesday it intended to publish a revised code in January 2024, but there would be significant changes to its 18 original reform proposals, with many ditched.
In particular, it will avoid introducing internal controls as rigorous as those faced by U.S. companies for ensuring accurate financial statements.
"The main substantive change we will take forward concerns revisions to our original proposal on internal controls," the FRC said in a statement.
"This includes allowing more time for its implementation and ensuring the UK approach clearly differentiates from the much more intrusive approach adopted in the US."
Britain has already refused to introduce a UK version of the tough "Sarbanes-Oxley" (SOX) rules in the United States that require senior U.S. company officials to personally attest to internal controls aimed at ensuring the accuracy of company statements.
Instead, the FRC had sought to introduce a "SOX-lite" regime via the code, though it did not elaborate on Tuesday how its original proposal would be rewritten.
The FRC also said it would not take forward over half of its original proposals for reforming the code, in particular those relating to the role of company audit committees on environmental and social governance, and modifications to existing code provisions around diversity.
Britain's financial services minister Andrew Griffith said he welcomed the FRC's "pragmatic and proportionate changes".
"The UK rightly enjoys a strong reputation for high governance standards but it’s important that we don’t burden our best and brightest companies to the extent that it’s not a level playing field versus our international competitors," Griffith said.
Separately, the government indicated on Tuesday it would not be bringing forward legislation to replace the FRC with a stronger watchdog to help improve auditing standards, a core recommendation from the reviews.
"It appears that corporate governance is not seen as a vote winner by politicians - despite the wide-ranging impact of the collapses of companies like Carillion and BHS," the Institute of Directors said in a statement.