Governance Readout

Although there has been a delay in progress of the Audit and Corporate Governance reform agenda, the government have now published their response to their March 2021 consultation. Although most of the original proposals are planned to be implemented, there are a number which, on the basis of the feedback received, will be altered.

These reforms will see the long-anticipated creation of the Audit, Reporting & Governance Authority (ARGA) as the replacement for the Financial Reporting Council. The new organisation will have a wider remit and increased powers in comparison to their predecessor.

The reforms will also see the existing concept of a Public Interest Entity (PIE) expanded to include all UK incorporated companies that have both 750 or more employees and an annual turnover of £750m or more. AIM companies which meet this threshold will also fall within scope of the new definition of a PIE.

A number of fundamental changes to the corporate governance and reporting landscape will be implemented, including:

• Directors’ Duties
  ARGA will have power to enforce breaches in relation to audit and corporate reporting.
  
  
• Internal Controls
  There will be a change to the Corporate Governance Code to require an explicit statement on the effectiveness of the company’s internal control systems. This was one of several options under consideration. An alternative had been the introduction of a statutory reporting and assurance regime similar to the US’s Sarbanes Oxley, which thankfully isn’t being progressed.
  
  
• Dividends
  PIEs will be required to explain their long-term approach to the return of value to their shareholders and how the policy has been applied in the reporting period. The legality of any dividend proposed or paid in the year will need to be confirmed.
  
  
• Reporting
  New reporting requirements applying to PIEs will include replacing the existing viability and going concern statement with a new statutory resilience statement, to be incorporated into the Strategic Report. Additionally, every three years there will be a requirement to publish an audit and assurance policy and an annual report on its implementation. Directors will also be required to report on steps taken to detect and protect against material fraud.

Computershare’s view

This is without a doubt the most significant development in Corporate Governance since 2016. Unfortunately, despite frequent calls to simplify and reduce the size of annual reports, we yet again see sizeable new reporting requirements added, with little taken away. That said, there were concessions from the government following the consultation including the welcomed removal of the proposed shareholder vote on the new Audit and Assurance policy, which would have been a likely protest vote target.

Nonetheless, governance professionals should watch developments carefully, as the devil will be in the detail. As we see changes to the Code, Listing Rules and eventually the Companies Act the wording will be key. For example, whilst the government did concede on a triennial vote on the new Audit and Assurance Policy, it did state the Boards will have to ‘take into account’ shareholders views on the matter. Although nuanced, ‘take into account’ can have a noteworthily difference in meaning, in terms of engagement and impact on directors' decision-making process, then ‘have regard for’ which directors are familiar with from their s172 duty.

This should be a prevalent item on the Agenda for all Audit Committees and the Board when the consultation for the amendment to the code is released in Q1 2023 and in the lead up to and during its implementation in 2024. Watch this space!