Proposed changes to UK Corporate Governance Code

Proposed changes to UK Corporate Governance Code: risk management now one of the most important board responsibilities.

Extract from Financial Reporting Council (FRC) Press Release – 6 November 2013:

The Financial Reporting Council (FRC) has published for consultation changes to the UK Corporate Governance Code, guidance for boards of listed companies and standards for auditors covering risk management and reporting. Supplementary guidance for directors of all banks is also being issued.
 
The proposals build on the FRC’s work on “Boards and risk” and aim to raise the bar for risk management by boards and communication to the providers of risk capital about the risks faced by companies in which they invest and how they are managed or mitigated.
 
In response to concerns expressed on earlier proposals issued in January, these new proposals set out afresh how the FRC will  implement the recommendations of Lord Sharman’s 2012 Inquiry ‘Going Concern and Liquidity Risks: Lessons for companies and auditors’. The Inquiry looked at the corporate governance and reporting lessons to be learnt from the failure of ostensibly healthy businesses in the financial crisis.
 
The FRC has made a key change in these proposals by bringing together its previous guidance on risk management and internal control with the assessment of the going concern basis of accounting; so encouraging the integrated assessment and reporting recommended by Lord Sharman.
 
Melanie McLaren, Executive Director, Codes and Standards, said: 

“Risk management is one of the most important responsibilities of the board. Understanding the principal risks facing the company is essential for the development of strategic objectives, and the ability to seize new opportunities.  For investors, as providers of risk capital, knowing how the board is managing and mitigating risks is an important indicator when judging whether the company will be able to deliver the value that investors seek. The new guidance, and the proposed changes to the Code, highlight the issues that boards need to consider when assessing and managing risk, crucially including risks to solvency and liquidity. We have placed considerable emphasis on the need for robust assessment by boards and on the important role of auditors in ensuring reliable communication to investors.”

 Broader Risk Considerations and Role of the Auditor
 
The draft guidance sets out boards’ responsibilities for setting the company’s risk appetite, ensuring there is an appropriate risk culture throughout the organisation, and assessing and managing the principal risks facing the company, including risks to its solvency and liquidity. As now, boards should summarise the process applied in reviewing the effectiveness of the system of risk management and internal control.  There is a new encouragement to explain what actions have been or are being taken to remedy any significant failings or weaknesses identified from that review.
 
Under the proposals, auditors will be required, in meeting their current requirement to consider whether reporting is fair, balanced and understandable, to consider and report if they are aware of any material matter in connection with the disclosure of principal risks that should be disclosed.
 
Solvency and Liquidity Risks and Going Concern
 
In response to the recommendations made by Lord Sharman the FRC proposes a new Corporate Governance Code provision and related guidance. They establish the need for a robust assessment by companies of how they manage or mitigate their principal risks, including risks to solvency and liquidity, and to explain which if any of those risks have also given rise to material uncertainties for the purposes of reporting on the company’s going concern basis of accounting.  The FRC is, therefore, proposing to remove the current Code provision requiring listed companies to make a “going concern” statement. That statement is focussed on the narrow meaning of assessing the going concern basis of accounting, and so detracts from the broader integrated assessment and description of solvency and liquidity risks envisaged by Lord Sharman.
 
Banking considerations
 
The Sharman Inquiry also looked at whether a special disclosure regime is required for banks and concluded that this should not be necessary.  The Inquiry considered it important that the FRC should clarify that a conclusion that a bank is or would be reliant, in stressed circumstances, on access to liquidity support from central banks that is reasonably assured, does not necessarily mean that the bank is not a going concern or that material uncertainty disclosures or an auditor’s emphasis of matter paragraph are required.
 
The FRC issued guidance for banks along those lines in January which found general support. Accordingly, the FRC is also now consulting on supplementary guidance to directors of banks updated only in respect of the proposed integrated guidance and developments in the regulatory regime.
 
Feedback Statement and Other Companies
 
 A detailed feedback statement on the FRC’s January proposals is also being published today. Those proposals extended to unlisted entities other than banks and met with considerable adverse feedback. The FRC plans to consult in 2014 separately on draft guidance for directors of such companies and is currently considering the development of simpler and more proportionate guidance.
 
The consultation announced today closes on 24 January 2014.  The FRC expects to issue the final Code, guidance and standards in the middle of 2014 with application for financial years beginning on or after 1 October 2014.

More … http://frc.org.uk/Our-Work/Publications/FRC-Board/Consultation-Paper-Risk-Management,-Internal-Contr.aspx