The year got off to an unexpectedly entertaining start with the eruption of a heated corporate-reporting row. The UK’s Financial Reporting Council (FRC) finds itself facing its old adversary, Pensions & Investment Research Consultants (PIRC). On the face of it, the mission for FRC boss Stephen Haddrill must have seemed simple enough: give evidence to the UK Parliament’s Business, Energy and Industrial Strategy (BEIS) select committee and show leadership from the front.
The UK’s corporate governance challenge, Haddrill told the committee’s 18 November hearing, was the lack of public confidence in business and its integrity. “The way it needs to be addressed is by invigorating the provisions in the Companies Act that ask directors or place a duty on directors to pay attention to stakeholders, other than the shareholder [Section 172],” said Haddrill.
He added: “Frankly, we have not given sufficient thought or appreciation to the company’s wider responsibilities beyond the shareholder. We have been focused very much on their responsibilities to investors.”
Section 172 requires company directors to promote the success of the company. It says a director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.
In doing so, it requires directors to consider several factors such as “the likely consequences of any decision in the long term”, “the interests of the company‘s employees”, and “the impact of the company‘s operations on the community and the environment”.
Rather than there being any need to reinvigorate section 172, PIRC hit back in evidence to the committee, section 414C of the Companies Act 2006 – the mandatory legal requirement for companies to produce a strategic report – already provides a basis to compel companies to report on their compliance with section 172.
Moreover, a recently issued government discussion paper on corporate governance from by the UK business ministry, BEIS, notes: “[T]here are disclosure requirements. All companies, other than companies qualifying as ‘small’ in the Companies Act 2006, have to prepare a strategic report as part of their annual report to provide shareholders of the company with information that will enable them to assess how the directors have performed their duties under Section 172. The legislation is not prescriptive, this is a strength since it provides companies with the flexibility to tailor their approach to suit their specific circumstances.”
The FRC has not taken PIRC’s claims without protest. In the run-up to Christmas, the regulator’s executive director, Paul George, hit back at the PIRC parliamentary submission. He wrote: “There are no specific legal requirements to report separately on the issues to which directors must have regard under section 172 and how they have done so, which has led the FRC to recommend that a change in the law is required. We made this point clear to the BEIS Select Committee in our follow-up letter.”
Separately, an FRC spokesperson told IPE: “Our concern is that the law does not explicitly require a company to report individually on all aspects of section 172 and more significantly how they have had regard to the factors and stakeholders listed therein in their decision making. We believe a change in the legislative requirements would improve the effectiveness of section 172 and better enable us to monitor and enforce the reporting requirements.”
A PIRC spokesperson told IPE: “The FRC said that there was no requirement to report on section 172 and that it needed a requirement in order to enforce things. The FRC has rowed back and is no longer denying the requirement to report, merely that it would prefer a rules rather than principles-based system to do it. This still begs the question of why the FRC was not policing the requirements of section 172 as currently drafted.”