An independent Corporate Governance Commission should be
established to oversee the UK’s corporate governance framework,
enabling the Financial Reporting Council (FRC) to better focus on
its core task of improving company audits, the Institute of
Directors has argued.
Recent corporate failures have highlighted the need for a
fundamental review of the purpose of the statutory audit and how
it is overseen by the regulator. However, business leaders fear
that having corporate governance and investor stewardship
regulated within the same body as statutory audit is a far from
ideal approach, given the differing regulatory approaches that
are needed in each area. The UK Corporate Governance Code and the
UK Stewardship Codes are both ‘soft law’ codes which aim to
influence corporate behaviour through best practices rather than
mandatory regulation. This contrasts with the oversight of
statutory audit where a more robust regulatory approach is
needed.
In its submission to the
Department for Business, Energy and Industrial
Strategy consultation on
the Independent Review of the FRC, the business group proposed
that the UK’s governance and stewardship codes be administered by
an independent body with close links to business and investors,
rather than simply being an ‘add on’ to an accounting regulator.
The IoD argues that the shaping of voluntary best practice for
boards of directors, and the setting and enforcement of
accounting standards are very different activities and should,
therefore, be overseen by separate bodies.
The IoD said the new commission would work with industry to
create greater accountability and transparency of the UK’s
corporate governance framework. This would help the process of
making changes to the UK Corporate Governance Code become more
transparent, with clearer lines of accountability, rather than
being subsumed by a large regulator where corporate governance is
just one concern amongst many.
As well as a new commission, the IoD recently proposed an
industry-led professional standards board tasked with upholding
high standards of director competence and continuing professional
development. This, it argued, would be a more effective and
proportionate way of enhancing director accountability, as
opposed to giving the FRC power to take action against
non-accountant directors.
The full submission can be
viewed here.
Dr Roger Barker, Head of Corporate Governance at the
Institute of Directors, said:
“Corporate governance has been swallowed up within a regulator
that now urgently needs to focus its energies on improving the
legitimacy of statutory audit. The FRC has for many years done a
good job acting as the keeper of the UK’s corporate governance
code, but we feel its centralised decision-making structure is
not conducive to the differing regulatory approaches needed for
governance and stewardship on the one hand, and statutory audit
on the other. There must be a clear distinction between being
robust on audit quality, while continuing to nurture the UK’s
much admired principles-based corporate governance regime.
“With recent high-profile corporate failures we see there are
legitimate concerns about the role of the accounting regulator.
There are strong arguments for bolstering its investigative and
enforcement powers over statutory audit. However, corporate
governance and investor stewardship are qualitatively different
areas of regulatory activity. They benefit from a much more
flexible and collaborative approach.
“It is unfortunate that the current remit of the regulator
creates an unhelpful perception that corporate governance is
simply there to supplement the accountancy profession, when if
anything the reverse is true.”
