HPC has issued our response to the Financial Reporting Council’s consultation on the Corporate Governance Code
The Financial Reporting Council (FRC) has published a consultation document putting forward various changes to the Corporate Governance Code, which will apply to financial years starting on or after 1 January 2025.
Corporate governance structures and practices, and the regulations and guidance that shape them, play an important role in how major employers distribute their expenditure on pay. They determine the extent of worker involvement in business strategy and high level decision-making. And they influence how strategy, decision-making and ultimately business practice aligns with the interests of wider society. There is a growing argument that the govenance reporting ‘burden’ on companies is harmful to business and there is a risk that this has been parroted enough times to become received wisdom amongst business political elites. However, the Corporate Governance Code and regulation more generally are meant to serve the public interest. One of the points argued in our response to the consultation is that public opinion polling reveals a strong demand for more, rather than less, regulation on business, including a poll for a recent HPC on worker voice.
We believe the Corporate Governance Code is of the utmost importance to the UK’s economic life, and welcome the new draft edition published by the FRC. Our response to the consultation supports the new provisions on Environmental, Social, and Governance (ESG) oversight and reporting – however, the new provisions are not currently worded in a way that will encourage signatories to comprehensively assess, manage and communicate their full social and economic impact.
In our response, we outlined a number of amendments that would considerably strengthen the code and better align the corporate governance standard with the interests of wider society. These include:
- Altering the vague wording used to avoid empty or boilerplate reporting of ESG matters.
- Require greater reporting on the rationale behind the board’s selection and rejection of each workforce engagement option. This will foster increased deliberation and, ideally, a more open-minded approach to worker directors.
- Whilst the broader view of diversity (beyond just protected characteristic) is to be encouraged, we believe it would be beneficial to explicitly reference diversity in terms of background, skills, and experience in order to ensure a comprehensive understanding of diversity.
- Greater emphasis on the long-term nature of succession planning – to avoid the focus to be merely on a pipeline from management to the C-suite – which would include the training and development of new starters.
We are particularly concerned about the code’s removal of the reference to pay gaps or pay ratios. Pay data, including pay ratios, is a critical metric for assessing executive remuneration and corporate governance practices. How major employers distribute their expenditure on pay is a major determinant of living standards in the UK. Therefore, we believe its removal sends the wrong signal.
We hope to see these suggested amendments when the final version of the code, which is set to apply on or after 1 January 2025.