Corporate Governance

Shearman & Sterling LLP Recent Corporate Governance Developments in the U.K. | 30 CONCLUSION These proposed reforms are undoubtedly significant for corporates and their auditors and, insofar as they aim to bring about clearer and more focused risk assessment and reporting by boards, have been largely welcomed by investors. Nevertheless, concern has also been expressed about possible regulatory overload and the potential conflict and impact of the proposals, including their cost, on the competitiveness of U.K. businesses, particularly at a time when the Government is also trying, through its major Listing Regime Review reforms, to make the U.K. a more attractive place in which businesses may choose to set up and list. As always, the proof will be in the pudding — will the new reporting requirements, onerous and demanding as they will be for many corporates and their boards, lead to fewer "accounting" scandals and failures in the future? Probably not by themselves, which is why the prospect AUDIT COMMITTEES Recognizing the critical role and responsibility that audit committees play in relation to their companies' external audit, the Government is proposing empowering ARGA to impose additional scrutiny and other requirements on audit committees with respect to their appointment and oversight of the work of external auditors. The focus will be on continuously monitoring audit quality and consistently demanding challenge and skepticism from auditors. The FRC already issues guidance for audit committees, and ARGA will be expected to continue to assist audit committees with its own guidance where appropriate. Shareholders will also be encouraged to have more engagement with their company pre-audit with the Paper's proposal that audit committees should seek shareholder views on the annual audit plan. The utility of that particular reform will, of course, depend on the willingness and commitment that institutional shareholders have to step up to the greater stewardship responsibilities and opportunities that these corporate governance and reporting reforms will offer. ARGA will be given a range of powers to enforce compliance with the new requirements, including calling for information from audit committees, issuing public notices detailing any findings in relation to failures to meet the new requirements, as well as, in appropriate cases, placing an observer on an audit committee or issuing direct statements to shareholders where ARGA is not satisfied with the action taken by a particular audit committee. These new requirements would initially apply to FTSE 350 companies but might be extended to other PIEs at a later date. ARGA – A NEW REGULATOR Following the publication of the Kingman Review, the Government wasted no time in announcing that it would take action to replace the FRC with a new regulator. Some of the alleged failings (or at least difficulties) of the FRC in regulating effectively and proactively corporate reporting and governance have been put down to the lack of clear statutory powers that it has in those areas, coupled with a perceived lack of focus in its regulatory agenda and remit. In addition, it is somewhat odd that a regulator with the importance that the FRC has to the U.K. economy, business and capital markets is still reliant, at least to some extent, on voluntary funding from market participants. The Paper proposes major changes to the regulator to address these issues. ARGA will be set up on a statutory basis with much clearer and more extensive regulatory powers and with a much clearer and better-defined remit than the FRC currently has. It will have, as a general objective when carrying out its policy-making functions, the protection and promotion of the interests of investors, other users of corporate reporting and of the wider public interest, supplemented by more specific duties, which will include promoting high-quality audit, corporate reporting, corporate governance, accounting and actuarial work, as well as effective competition in the statutory audit services market. It will also be funded by a new statutory levy mandatorily payable by market participants. In advance of legislation being introduced to make some of these changes, the FRC has already made important changes to its leadership and board to help improve its internal governance. of PIE directors being required to meet certain behavioral standards is of particular interest, but also of some concern as to how the new liability regime would interact with the existing liability regimes for U.K. directors. Whether the enhanced enforcement powers of the new regulator and the Paper's other proposals with regards to enhanced PIE audits and measures to increase competition in the statutory audit services market will also succeed in improving U.K. corporate reporting and governance, remains an issue in debate, particularly as regards resourcing and capacity concerns. The challenge now lies with the Government to prioritize those reforms which both corporates and investors can agree are likely to bring about the sorts of improvement to the U.K.'s corporate governance regime that recent corporate failures have highlighted.

• Cover