Proposed reporting rules shelved and UK listing barriers lowered as government scrambles to attract businesses.
The scrapping of a bill that would have strengthened corporate governance reporting requirements for UK companies has left investors and policy experts questioning what this means for broader reform ambitions.
The plans were originally set out in July, proposing that businesses with a turnover of more than £750 million (US$911 million) or over 750 employees provide an annual resilience statement, distributable profits figure, material fraud statement, and publish a triennial audit and assurance policy statement.
The draft law was part of a series of audit and governance reforms that have been consulted on and proposed in response to high-profile scandals, such as the collapse of Carillion.
“We think these rules would have been helpful in giving investors the information needed to better understand the resilience and financial health of the UK companies we invest in,” Caroline Escott, Senior Investment Manager for Active Ownership at UK pension fund Railpen, told ESG Investor.
Dr Roger Barker, Director of Policy and Government at the Institute of Directors (IoD), said the fact the proposal has been dropped at such a late stage, following “several years” of consultations, whitepapers and stakeholder engagement, has “come as a surprise” to many in the business community.
The government has explained that this decision follows concerns raised by companies about “imposing additional reporting requirements”, adding that they would have also incurred additional costs for companies by requiring them to include more information in their annual reports.
Escott acknowledged that companies shouldn’t be reporting “for the sake of it”, but argued these requirements were “sensible, proportionate proposals” for disclosure on issues which are “highly material” and would have supported a more “fruitful investor-company dialogue”.
Tim Bush, Head of Governance and Financial Analysis at Pensions & Investment Research Consultants (PIRC), pointed out “the law already requires the number for real profits that these rules would have required transparent disclosure of”.
“Any company saying it was burdensome would be admitting to not knowing the number they are already supposed to know,” he said.
IoD’s Barker queried whether the government’s rowback has been prompted by broader concerns about London’s current competitiveness as a market for initial public offerings (IPOs).
London attracted just five IPOs in Q1 2023, which is an 80% fall compared to the same period the year prior, where there were 19 IPOs that raised £400 million. In Q1 2021, £5.7 billion was raised in UK markets.
“There is an attitude that is quite prevalent among certain groups that the government really must not introduce anything that could be perceived as increasing the reporting burden of listing in London,” he noted.
ARGA in question?
The government has reiterated its commitment to wider audit and corporate governance reform.
This includes the establishment of a new statutory regulator to replace the UK Financial Reporting Council (FRC), following criticism of the the watchdog’s limited remit.
Barker warned that the establishment of ARGA will be delayed until after the next UK General Election, noting that the King’s Speech on 7 November is “the last opportunity for ARGA to get on the government’s legislative agenda before the election”.
There was concern last year that the topic of audit reform was at risk when it was excluded from the late Queen’s Speech.
“It looks to me as if [ARGA’s] been kicked into the long grass by the government for now,” said Barker.
The government has said it will bring forward legislation to deliver reforms, such as the establishment of ARGA, “when Parliamentary time allows”.
There is now also a big question mark over reforms to the UK Corporate Governance Code, added Barker.
In May, the FRC proposed strengthening requirements on sustainability and ESG reporting through revisions to the UK Corporate Governance Code. Revisions include amending the Code to reflect the responsibilities of corporate boards and audit committees for sustainability and ESG reporting and appropriate assurance.
Entities had until 13 September to respond to the consultation. Any subsequent revisions to the Code will take effect for reporting periods beginning on or after 1 January 2025.
“A number of the proposed changes were predicated on the introduction of these dropped [corporate governance] reporting requirements,” Barker said.
“The [Code proposal] refers to them and provides guidance on how to respond to them. So that aspect of the package has been thrown into question.”
Earlier this month, the FRC published a consultation to strengthen auditor requirements to detect and report material misstatements from non-compliance with laws and regulations. It also aims to clarify instances auditors should report to regulators, such as breaches.
The consultation closes on 12 January 2024.
On the issue of audit reform, Bush emphasised the importance of transparency on what lobbying has taken place, confirming that PIRC has filed a Freedom of Information request.
“Market for lemons”
The decision to shelve the proposed reporting reforms follows the Financial Conduct Authority’s (FCA) changes to UK listing rules, which have also received criticism.
In May, the FCA published a consultation paper outlining plans to change rules on listing companies on the London Stock Exchange in a bid to make the UK a more attractive setting for companies.
The FCA has proposed combining its ‘premium’ and ‘standard’ listing categories while easing other listing requirements, such as the requirement for a detailed financial track record and relaxing dual class share class rules (DCSS).
One of the biggest concerns flagged by investors is that a more permissive approach for companies with DCSS will limit their ability to influence investee companies through voting.
The FCA has introduced the concept of a ‘sunset clause’, meaning that companies will be allowed to IPO with a DCSS structure in place, but they must transition to a one share, one vote structure within the first few years.
Bush from PIRC said the FCA’s “dumbing down” of the UK listing rules has created a “market for lemons”.
“The FCA has lost the plot on listing rules. It’s listening to management when the attractiveness to invest depends on investor confidence. The UK is now becoming a junk market, hence the better regulated markets in the US and France are putting London in the shade,” he noted.
On the scrapping of corporate governance rules and the FCA’s listing rules proposals, Escott from Railpen said: “It’s hard not to be worried about the broader direction of travel on UK corporate governance policy.”
As a UK-based asset owner, Railpen wants to see thriving UK capital markets, Escott told ESG Investor.
“What the current corporate governance policy debate and decisions still fail to recognise is the extent to which the UK’s longstanding role as a beacon for robust investor protections and corporate governance standards made it attractive to both companies and investors as the world’s ‘quality’ market,” she said.
“As responsible, active and long-term stewards of capital, we are dismayed at the course currently being pursued, and will continue to advocate alongside the many other concerned investors for a policy and listings environment which helps us secure our members’ futures.”
This will come into effect on 31 October and will apply to current and future performance years.
In recent weeks, UK Prime Minister Rishi Sunak has also prompted policy uncertainty by taking a less ambitious stance on climate policy and commitments.