FRC backs new governance requirements for large private companies

The body, which already oversees compliance by publicly listed companies with the UK Corporate Governance Code, was responding to the government's 'green paper' on corporate governance reform, which was published late last year.

In its response (11-page / 5.6MB PDF), the FRC said that the need for transparency was "often just as relevant" for large private companies as for listed companies, particularly those of "economic significance" or "sectoral importance". However, any new governance framework would have to be "tailored to take into account [private companies'] specific and different ownership and governance arrangements", the FRC said.

Last week, the FRC announced its plans for a fundamental review of the UK Corporate Governance Code, which will take into account its recent work on corporate culture and succession planning as well as the issues raised in the green paper. Public listed UK companies are required by law to comply with the Code and its reporting requirements, or to explain why they do not.

In its own response to the green paper, the UK parliament's Work and Pensions Committee recommended extending compliance with the Code to large private companies and those with more than 5,000 defined benefit pension scheme members.

The FRC has proposed reforming the existing corporate governance framework in four areas in particular, in an attempt to "win back public trust". These include the interests of major stakeholders, executive remuneration and effective enforcement, along with increased accountability for large private companies.

As trailed last week in a speech by FRC chair Sir Win Bischoff, the body is seeking extended enforcement powers from the government as part of its proposals for reform. The current regulatory framework is "fragmented", with gaps in enforcement action; while existing mechanisms to hold directors properly to account for their actions do not always work effectively, according to its response.

In particular, the FRC is seeking the power to investigate and prosecute all listed company directors for financial reporting breaches and associated issues of integrity. Currently, it can only take action against auditors, accountants and actuaries, even where the evidence suggests that others are equally responsible of a breach of regulations.

On executive remuneration, the FRC has recommended better reporting on topics such as the link between business results and remuneration outcomes, and extended the role and remit of the remuneration committee to cover pay policies throughout the organisation. The UK Corporate Governance Code should be revised in order to clarify consultation and reporting requirements where shareholders consistently vote against pay policy, and this should be supported by a legal process allowing for "an escalation of options" when a company receives a significant number of votes against its remuneration report.

The FRC has also called for directors' duties under section 172 of the Companies Act to be "reinvigorated". Currently, directors are required to promote the success of the company, while having regard to a range of other factors including long-term consequences, the environment, employees, suppliers and customers. However, there is no requirement for them to report on how they have done so. The FRC has called for the introduction of a new reporting requirement linked to the section 172 duty, so that boards are required "to demonstrate how they had regard to wider stakeholders in their key decisions".