26 April 2013

FRC/Haddrill highlights quality of corporate governance and financial reporting

Mr Haddrill focused on corporate governance and stewardship, IFRS and accounting standards and audit.

According to Mr Haddrill, the FRC strongly believes that good governance enhances corporate performance. A well-governed Board will be clear about its vision for the business and its strategy for achieving it. At the same time, it will manage risk effectively and be a good steward of the assets entrusted to it, all of which should enhance sustained profitability. In September 2012 the FRC revised the UK Corporate Governance Code.This Code operates on a “comply or explain” basis, an approach backed by many in Europe. Comply or explain has allowed them to be more aspirational: companies have accepted change more readily knowing they have flexibility in adoption. So the UK has achieved annual election of directors, separation of the roles of Chairman and CEO and independent audit committees without the need for regulation.

The FRC therefore welcomes the EC’s support for the principle of “comply or explain” in the Company Law Action Plan, and its recognition that corporate governance codes can play an important role in raising standards and spreading best practice.

The Commission has rightly highlighted that the credibility of this approach requires any explanations to be clear and company-specific so that shareholders can judge whether they are appropriate.

In updates to the UK Corporate Governance Code late last year, the FRC included a requirement that companies should explain their policies on boardroom diversity and progress on achieving them. This is a similar approach to the proposed disclosure requirements in the 4th Directive which the Commission published last week.

The market for risk capital, when it is working well, enables savers to share in the growth of the most successful companies, and those companies to attract risk-sharing capital at the lowest possible cost. It is a powerful driver of growth. It is necessary more than ever, in the wake of the banking crisis, a diverse, well-functioning capital market. The provision of risk capital to companies depends on the confidence providers can have that their interests are protected.  Protected, that is, by a good board, and buttressed by clear and honest reports on the company’s performance.  Hence the FRC´s work on reporting as well as auditing governance.

The information companies provide should be directly relevant to the promotion of long term equity ownership, and stewardship reporting should be clear, relevant, timely and related closely to the needs of long-term owners who need to play their part as stewards. 

High quality corporate reporting plays in underpinning investor confidence in Europe. The FRC supports global accounting standards which underpin confidence and provide a common platform for growth.

The FRC plans to hold discussion groups in London and Brussels with investors to better understand their priorities and concerns with continued global convergence. Evidently there is frustration around the US delay, but believes that continued work with the IASB, especially to get early adoption of IFRS 9 and an effective endorsement programme, can put Europe at the forefront of implementing modern accounting practices.

The FRC will give its support to initiatives that drive up the quality of corporate reporting, including narrative reporting, while reducing the regulatory burden on business and the complexity of information within reports.

Audit quality contributes to financial stability. The FRC believes that all proposals should be tested in terms of their impact on audit quality. It is most important that the company has the best auditor they can find. They cannot be certain they have achieved that unless they retender the audit on a regular basis. The FRC has introduced once every 10 years in the UK.

The FRC does not favour mandatory rotation because the incumbent auditor, who may be the best auditor, has to go, however good a job they are doing.

Mr Haddrill concluded: “Investors have the power to make choices that directly affect capital markets. What is important is making sure that they can make those choices based on objective and useful information. Corporate governance and reporting are an essential element in helping them make that choice and this is an area in which Europe can lead the world."

Full speech

© FRC