BEIS Consultation on ‘Restoring trust in audit and corporate governance’

The IR Society response to the BEIS Consultation on 'Restoring trust in audit and corporate governance'

The Rt Hon Kwasi Kwarteng MP
Secretary of State for Business, Energy & Industrial Strategy
1 Victoria Street

8 July 2021

Dear Mr Kwarteng,

Response to ‘Restoring trust in audit and corporate governance – Consultation on the Government’s proposals’

Thank you for giving us the opportunity to comment on the BEIS consultation: Restoring trust in audit and corporate governance. This response represents the views of the UK’s Investor Relations Society (‘the IR Society’).

The Investor Relations Society’s mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and Government; and to act as a forum for issuers and the investment community. The Investor Relations Society represents members working for public companies and consultancies to assist them in the development of effective two-way communication with the markets and to create a level playing field for all investors. It has approximately 800 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.

We have considered and set out below specific responses to a number of the questions in the consultation. In doing so, we have selected those issues that are most relevant to the Society’s members.

A summary of our key points is set out below, both at the overall level and by the main topics of consultation:


The recommendations contained in the consultation paper are the product of deep review of audit and governance matters by expert committees and offer many important steps towards offering greater confidence to, and building further trust with, investors.

The scope of corporate reporting and the insight provided, has already evolved substantially in recent years and is set to go further in areas such as climate reporting, so we support efforts to make audit and the annual report more informative.

  • We recognise the damage that corporate failures can do across communities and society, as well as the effect this can have on investor confidence. So proportionate measures that improve control and oversight over business, including challenge at suitable moments, are welcomed. Director responsibility is an important part of this process.
  • Nevertheless, we would observe that in our experience, companies are typically run well, supervised by boards that are prudent and serious in their governance and are committed to meaningful dialogue with investors. The examples of corporate failure in both the listed and private sectors are relatively exceptional, though a matter rightly of great concern.
  • Accordingly, we believe reforms that apply to a wide group of companies need to be proportional in their application, weighing up the perceived benefits against the time involved and cost required to implement the provisions and ensure compliance.
  • A number of the proposals will likely provide useful insight to investors and other stakeholders, as well as assurance, but we would also ask that consideration is given to the time and resource that will be required in implementing the measures for companies to whom the final provisions apply.
  • Related to this, we believe that many companies could experience pressure on capacity given the need to implement the large number of proposals contained in the document, particularly at the current moment as companies emerge from the pandemic and face a number of other regulatory and investor demands. This may also become an issue in the wider system, as auditors, corporates, regulators and investors seek to employ additional expertise.
  • We are concerned to avoid too much additional burden on companies at a time when their competitiveness in the global market-place is crucial and also in the context of other initiatives that seek to make the UK an attractive place for companies both to locate and list.
  • Given the above, we would suggest a phased timetable for implementation wherever possible, giving companies time to establish processes and build staffing levels in order to meaningfully meet requirements, without detriment to their businesses and competitiveness.
  • We also believe it is important to consider the various proposals asking whether each would always provide better and more effective engagement with investors. To pick out one example, in the case of audit, will most investors in practice have the capacity and desire fully to engage?

The Government’s approach to reform

  • We believe large private companies should be included within the definition of a Public Interest Entity (PIE) to establish equivalence with their listed peers and, in terms of the specific universe of companies to be included, we favour the Government’s Option 2 as set out on page 33 of the consultation document.
  • With regard to AIM companies with market capitalisations above €200m, the ethos of this market is to foster higher growth entrepreneurial companies with lighter touch governance than is applied to premium listed companies. Their investors in our view generally accept this trade-off and we would suggest that this group are not brought into mandatory scope.
  • We believe it is desirable that the Government should provide sufficient time for companies to prepare, where they are included in the new definition of a PIE, given the demand it is likely to represent to develop systems and processes to comply.

Directors’ accountability for internal controls, dividends and capital maintenance

  • We believe there is a case for strengthening the internal control framework for UK companies to provide greater comfort to stakeholders.
  • In this regard we support the Government’s initial preferred option (Table 2 as set out on pages 48 and 49 of the consultation document).
  • Accordingly, our preference is that directors should be required to attest an adequate internal control structure and procedures for financial reporting. We agree that decisions about whether the internal control effectiveness statement should be subject to external audit and assurance should largely be a matter for audit committees, though we are not convinced this is typically a matter for shareholders.
  • We understand the theoretical interest in having a figure for distributable reserves, and that this might have provided useful challenge in certain cases. However, we are not of the view that investors focus very closely on this factor in their questions about dividend. Distributable reserves are a backward-looking measure and there are many other factors that boards consider when setting or proposing dividends, including future prospects, cash flow and the signal they are giving to investors. Boards give very careful consideration in setting their dividend payments.
  • We believe that an explicit statement about the legality of dividends and their effect on the future solvency of a company would be effective and potentially sufficient. We would suggest that these requirements be applied to all PIEs to provide a degree of harmonisation.

New corporate reporting

  • We are supportive of the introduction of a resilience statement recognising, and agreeing with, the drive to focus on the longer-term prospects and sustainability of a business. However, companies have varying levels of visibility into prospects for their businesses and for some, consideration of time horizons beyond five years poses challenges in terms of realistic risk forecasting.
  • With regard to incorporating climate reporting, in our opinion, the Resilience Statement should not be a vehicle for TCFD reporting although it might usefully include a summary of TCFD analysis and conclusions as part of the drive to integrate sustainability factors more widely in the annual report and accounts.
  • We approve of the proposal to delay the introduction of the Resilience Statement in respect of non-premium listed PIEs for two years as it would give companies time to establish the processes required at a time when there are many other demands on them. We believe that recently listed companies should be in scope but entitled to a two-year delay period for implementation in line with that proposed for non-premium listed PIEs.

Company directors

  • The IR Society supports the concept of directors’ accountability and responsibility in accordance with the principles of the UK Corporate Governance Code but believes these should be balanced against the increasing burden of tighter provisions.
  • With specific reference to malus and clawback, we would welcome further clarity and guidance on who provides judgement on questions of materiality and misconduct or reputational damage; what factors need to exist or thresholds passed in respect of each condition before clawback provisions are triggered; and what levels of clawback apply.

Audit committee oversight and engagement with shareholders

  • We would like to see further explanation and clarity regarding the proposals and implementation method for giving shareholders a formal opportunity to engage with risk and audit planning. In our view, this proposal raises a number of questions which need to be resolved prior to successful implementation, not least the extent and depth of the additional anticipated engagement which may have resource implications for companies. As stated above, we also have reservations about the extent of the appetite of many investors to engage.

A strengthened regulator

  • We agree with the proposed general objective for ARGA and would welcome a well-resourced regulator with suitably expanded powers. We agree it will be important to define carefully the respective responsibilities of ARGA and other regulatory bodies, notably the FCA.

In the section that follows, we have provided specific answers to a number of the consultation questions that have been posed.

We hope you find these comments useful and please do not hesitate to contact me if you have any further questions.

Yours sincerely,

Nigel Pears

Chair of the Investor Relations Society’s Policy Committee

0207 379 1763

Published 13 July, 2021

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