Brexit and corporate governance
ICAS views on where UK corporate governance is headed in the wake of Brexit.
The impact of Brexit on corporate governance is likely to be low, this is because the UK has been at the forefront of international good practice and helped shape EU corporate governance regulations.
To date, EU regulations have been largely implementing arrangements for corporate governance which echo existing UK arrangements.
The UK’s strength in this area, as a leader in good practice should be maintained.
While corporate governance in the UK is strong it will need to evolve to meet new demands and challenges.
Robust corporate governance is a very important aspect of a positive business environment; a successful economy needs a trusted business environment to thrive.
How this might be affected if the UK sought to become a more tax competitive environment remains to be seen.
How European regulation impacts UK corporate governance
The corporate governance landscape is comprised of legislation, regulation and good practice codes. Company law and corporate governance arrangements are influenced by UK and European requirements.
The European Commission's latest assessment of corporate governance is set out in their Action Plan on company law and corporate governance (December 2012). This outlines several initiatives, mostly to enhance disclosure requirements or address areas of corporate law harmonisation (for listed companies).
The Shareholders Rights Directive (implemented in the UK in 2016) stems from the Commission’s Action Plan. This includes the ‘comply or explain’ approach – a flexible and effective approach to the adoption of good practice which the UK has successfully exported to Europe.
More work is anticipated from the European Commission’s Action Plan related to strengthening shareholder rights.
The impact further changes may have on the UK is unknown as there is still considerable uncertainty around the precise form of Britain’s future relationship with the EU.
Having an international reputation for being a trusted, supportive and efficient place to do business is increasingly important. Alignment with international norms, where appropriate, and achieving mutual recognition of standards would help to position the UK and reduce unnecessary barriers for cross-border trade and investment.
We are supportive of the recent developments in transparency and trust in company law, the increasing recognition of the importance of ‘doing the right thing’ in business and a diverse funding environment to encourage investment in early stage businesses.
In summary, our initial policy positions are to:
- Retain the existing company law, corporate governance and listing rules environment as well as International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISAs) for both the public and private sector.
- Retain the Financial Reporting Council (FRC) as the standard setter for corporate reporting, corporate governance and assurance (including the comply or explain approach to regulation) as well as its other roles such as overseeing regulatory activities of the accountancy profession.
What ICSA: The Governance Institute says
ICSA agrees that the impact of Brexit on corporate governance in the UK will be low and that the UK has set the standard in corporate governance reporting for the rest of the EU.
While praising the Government’s Green Paper on corporate reporting, ICSA warns, however, of the potential for complication.
“[…] one of the challenges will be that of unfocussed regulation; of ideas which are intended to solve one perceived issue failing to do so or, worse, misidentifying the real issue and creating a new one,” commented Peter Swabey, Policy & Research Director of ICSA.
Considerations for reporting and disclosures
As well as long-term issues, there are some short-term points facing business as we approach the peak reporting season.
Boards of UK companies will need to ensure that business risks have been identified, are appropriately updated and tested against different scenarios to improve adaptability and preparedness in this evolving climate.
Directors are responsible for ensuring that the Strategic Report prepared is fair, balanced and understandable. As well as adequate disclosure of operational risks there may also be financial risks such as changes to impairments, going concern and currency rates to consider and report.
High-quality narrative that supplements the financial statements and includes managements’ view of the outlook of the business is key. For other reporting tips, read FRC issues reminder to directors following UK decision to leave the EU.
Direction of travel
There is an increasing move to shape corporate governance in a way which gives greater emphasis to social issues, both in Europe and the UK. This is evident in the Department for Business, Energy and Industrial Strategy’s Green Paper on corporate governance reform, which ICAS responded to.
Company law is based on shareholder primacy; however, we would argue that without needing to change the legal basis, it is beneficial to longer-term sustainable success to evolve towards a broader stakeholder-focused system.
These different perspectives bring a greater awareness of the impact of decision making on the wider economy and community, and can work together.
Effective corporate governance cannot be achieved solely through regulation. More emphasis on boards setting and implementing the right culture, values and behaviour across their organisations to achieve sustainable success is important.
Greater consistency in the application of robust stewardship responsibilities by the investment community is key.
Have your say
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