UK prime minister Rishi Sunak, September 2023

Steve Giles is a consultant and lecturer in governance, risk and compliance



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October and November 2023 felt like watershed months for UK corporate governance. Only days after the Financial Reporting Council (FRC) fined KPMG a record £21m for serious audit failings preceding the collapse of Carillion, the government announced the withdrawal of proposed secondary legislation stipulating more disclosure in key areas of corporate reporting.

Additionally, the King’s Speech in early November confirmed widespread leaks that long-trailed plans for more robust regulation would not be enacted in the current parliament session.

The withdrawal represents a sudden and significant change of direction

Greater transparency and holding both directors and auditors more to account were central planks of the government’s longstanding corporate governance reform agenda – no longer.

No panacea

The draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 were laid before parliament as recently as July. They would have created significant new reporting requirements, including annual statements on resilience, distributable profits, material fraud and a triannual audit and assurance policy statement. The draft regulations were to apply not only to listed companies but to large private companies also. They were withdrawn on 16 October.

The government described this as its ‘latest move to cut red tape for businesses’, withdrawing ‘burdensome’ legislation following consultation with companies. It promises a new reform package to deliver a more targeted and effective framework for business and investors, enabling the UK to remain one of the best places for firms to list and do business.

‘The new reporting requirements were seen by many as a relatively light-touch response’

However, the withdrawal represents a sudden and significant change of direction. The announcement was greeted with disappointment by the profession and businesses.

‘The new reporting requirements were seen by many corporate governance experts as a relatively light-touch response to what happened at Carillion, BHS and other failed companies,’ says Dr Roger Barker, director of policy and corporate governance at the Institute of Directors. ‘Although not a panacea in themselves, they attempted to address, as part of a larger programme of reform, some of the governance failings that had emerged from these cases.’

Trust and attractiveness

So, let’s reflect on the reasons behind the reform programme that began under Theresa May’s government in 2016 and take stock of the current state of the UK’s corporate governance regime.

Tougher regulation and sharper accountability were felt necessary to prevent more scandals

Government reforms have involved expert committees, inquiries, consultations, green and white papers, all with wide-ranging business engagement. Efforts to strengthen corporate governance were driven by two complementary objectives: to restore trust in business and to promote the attractiveness of UK capital markets.

The background to reform was continuing corporate failures, poor director behaviour and audit shortfalls at BHS, Carillion and other large companies. Tougher regulation and sharper accountability were felt necessary to prevent more scandals.

Rebuilding trust

Three initiatives have been central to government efforts to rebuild trust, the first being to increase the effectiveness of the UK Corporate Governance Code. In 2018 it went through a major overhaul: incorporating a wider stakeholder focus; recognising the importance of diversity and culture; and linking long-term success to company purpose, strategy and values.

Another code revision is coming, following extensive consultation. However, in November the FRC issued a policy note saying that it is taking forward only a small number of the original 18 proposals – ‘the right balance at the current time’. This creates further uncertainty for business. The updated code will be published in January 2024.

Simplifying regulations makes investing in London more uncertain, which may deter investors

There has also been a widening and sharpening of the governance lens. Scrutiny was extended beyond listed companies by the 2018 Wates Principles: a governance framework for large, privately owned businesses. Also, measures to sharpen corporate reporting provide greater transparency in the key governance areas of executive pay, communication with employees and sustainability metrics. By withdrawing the draft regulations, the government has halted both initiatives.

Finally, there is audit reform. Central to the government’s proposals is the creation of a new regulator, the Audit, Reporting and Governance Authority (Arga) to replace the FRC and provide more robust scrutiny of audit firms. However, the necessary legislation to create Arga was not included in the King’s Speech.

The government says it remains committed to establishing Arga, but clearly it is not a priority. There is broad consensus on the need for tougher regulation, so this appears to be a backward step.

Foreign focus

The other growing government concern is the need to act to bolster the City against foreign (mainly US) competition and re-affirm the UK’s reputation as a business-friendly destination. Efforts here, in contrast to other governance reforms, are accelerating.

The cap on bankers’ bonuses was removed in October 2023, and the listing regime is being overhauled. After making targeted rule changes in 2021, including lowering free-float levels and allowing certain forms of dual-class share structures, the Financial Conduct Authority is now consulting on more ambitious changes to simplify the rulebook. These include replacing London’s existing standard and premium markets with a single listing category for company shares.

In addition, there are the Edinburgh Reforms of 2022, combining new and existing regulatory initiatives involving consultations and future work. One significant development is the new objectives given to regulators for growth and international competitiveness.

‘The PM seems to be making the political calculation that corporate governance is not a vote winner’

Finally came this year’s Mansion House Reforms. Amid announcements simplifying the rules further – for example, on buying and selling shares, and prospectus documentation – the Chancellor welcomed agreement by UK pension companies to commit 5% of their investments to private equity, hopefully in UK asset classes.

Withdrawing the regulations and delaying audit reform suggests moving away from the government’s long-standing strategy of simplified rules balanced by tougher regulation and greater transparency. ‘The prime minister seems to be making the political calculation that corporate governance is not a vote winner,’ says Barker.

All this is not without risk, however. Simplifying regulations makes investing in London more uncertain, which may deter investors. And what will happen to public trust if there is another Carillion?

More information

Read Jane Fuller’s latest column, Preventing the next audit scandal, about the fallout from KPMG’s failed audit of Carillion