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28 May 2010

ACCA responds to FRC's proposed changes to new UK Governance Code - FRC could have gone further


ACCA has some reservations about some of the provisions of the new Code. For example, all directors of FTSE 350 companies should be subject to annual re-election. During the consultation process, ACCA expressed concern that these changes could lead to an even greater focus on the short-term.

'Some good changes, but FRC could have gone further' is the message from ACCA (the Association of Chartered Certified Accountants) in response to the Financial Reporting Council's (FRC) unveiling of changes to the UK's Corporate Governance Code.
This latest update, the first since June 2008, is the end-product of a review that began in March 2009.
'While many of the amendments are welcome, we have some reservations too,' says Paul Moxey, ACCA's head of corporate governance and risk management. 'For example, the new code says that all directors of FTSE 350 companies should be subject to annual re-election. This isn't a surprise, but during the consultation process ACCA expressed concern that these changes could lead to an even greater focus on the short-term. We shall wait and see what the effects are.'
ACCA is supportive of the role that the FRC plays in the financial system and it is very encouraging to see the FRC, in the preface of the new code, signal that it intends to give greater weight to principles - as opposed to rules - to guide business behaviours. As recent financial crises have shown, rules designed to clamp down on bad behaviour can easily be sidestepped.
ACCA would have liked the FRC to have gone further in its focus on values and principles, as Paul Moxey explains: 'The first section of the new Code says "Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and is to be distinguished from the day to day operational management of the company by full-time executives". We support this, but there is just one other reference to values and this is the first supporting principle - "The board should set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met".
'We think this is a very important principle and have recommended that the FRC elevates it to a main principle so that companies would have to say how they do this. We are also disappointed that the new Code has not said anything about ethics.
'The FRC announced in the preface that the review has focused on changing the "tone" of the code to signal the importance of principles. We strongly welcome this and support the suggestion that the chair reports personally on the principles relating to the role and effectiveness of the board. But we would have liked the Code to have gone further. 
'For example the section dealing with engaging with institutional shareholders could have suggested that companies should pay attention to how they say they apply their principles.'
While the FRC hasn't gone as far as ACCA would like with some changes, others are welcome.
'The FRC has removed references to risk appetite and risk tolerance from the section C2, which is all about risk management and internal controls,' says Paul Moxey. 'There is much confusion about what those terms mean and the revision makes good sense. It expresses the same intention much more clearly - that the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives, which is very important.'
The FRC's revised code coincides with the release of ACCA's new paper on ethics and corporate governance, Risk and Reward - Tempering the Pursuit of Profit. The paper identifies a massive failure of 'people risk' as a significant factor in the problems experienced in the financial system prior to the recent crisis.


© ACCA - Association of Chartered Certified Accountants


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