The UK’s Financial Reporting Council, which sets the country’s corporate governance code, has criticized UK listed companies for merely “paying lip service” to changes in Britain’s corporate governance guidelines that recently came into effect. The UK boardroom regulator said that a review found that many companies prioritize “strict compliance” but give “insufficient consideration” to the importance of culture and strategy in the context of ensuring good corporate governance.”
The FRC revamped the UK’s 25-year-old corporate governance code in 2018, introducing guidelines for boards to scrutinize corporate culture, among other duties. The FRC also urged boards to pressure management to take action — to be detailed in annual reports — when it finds culture to be in tension with the company’s stated strategy.
“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the code and does a disservice to the interests of shareholders and wider stakeholders, including the public,” said Jon Thompson, FRC chief executive. In the wake of several high profile corporate failures, the FRC urges companies to put greater focus on the outcomes of implementing its governance code in 2020.
It is important to note the clear distinction the FRC draws between compliance and governance. Too often, the two ideas are conflated. But compliance is about checking to assure that a firm is operating in accordance with mandates imposed upon it by regulators. That is, compliance is externally driven. By contrast, governance should be driven by internally established concerns for shareholder and stakeholder interests.
While governance and compliance priorities may often align neatly, it is governance that is the responsibility of boards, and the FRC has indicated that this responsibility cannot be effectively outsourced to a firm’s compliance function.