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How will UK corporate governance reforms affect company directors?

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United Kingdom

Proposals to enhance transparency obligations and increase sanctions for non-compliance mean directors should be thinking about the robustness of their corporate governance and financial management processes.

 
The UK government recently announced plans to overhaul the UK corporate governance and audit regime.

These reforms are intended to improve financial reporting and controls and restore confidence in business, following a number of high-profile accounting scandals and company collapses, such as Carillion and Patisserie Valerie.

In these cases, company directors and auditors missed clear red flags and discrepancies in the accounts.

In February 2021, it was reported that the government was proposing to make company directors personally liable for the accuracy of company financial statements, regardless of company size (see our previous article: UK audit reform: Balancing rigour with competitiveness).

The government has however pulled back from this position and reforms are now mostly targeted at large businesses and their directors.

The current proposals are as follows:

  • To make directors of large companies more accountable for serious failings in relation to financial reporting, which could lead to fines or suspensions in the most serious cases. Serious failings would include significant errors in the company accounts or crucial information being concealed from auditors;

  • To require companies to write clauses into directors' contracts that require their bonuses to be repaid in the event of a serious director failing or company collapse up to two years after the bonus was paid; and

  • To require large companies to be more transparent about their financial situation prevent businesses from paying dividends or bonuses if they are in financial difficulties. Directors would also be required to publish annual 'resilience statements', which would show how the business is mitigating short and long-term risks.

What does this mean for UK company directors?

At the moment, nothing has changed. The government will first undertake a consultation process, which closes on 8 July 2021.

Parties involved in the consultation process include the Institute of Chartered Accountants the Institute of Directors.  

What are company directors' current statutory duties?

Directors of all companies (not just large businesses) already have significant responsibilities in relation to financial management of the company under the Companies Act 2006 in the UK.

Briefly, directors statutory duties are to:

  • Act within your powers;

  • Promote the success of the company;

  • Exercise independent judgment;

  • Exercise reasonable care, skill and diligence;

  • Avoid conflicts of interest;

  • Not accept benefits from third parties; and

  • Declare interests in proposed or existing transactions or arrangements with the company. These duties are already likely to catch any issues or errors with company accounting, so the introduction of fines and suspensions for serious failings is not a major step up.

The importance of good governance and financial management systems

If companies already have good corporate governance and financial management systems in place, the proposals are not cause for concern.

Good practices include keeping company policies under constant review and ensuring that company accounts are reviewed thoroughly and meaningfully, raising and addressing any anomalies immediately.

What do company directors need to do in the light of the government consultation process?

Companies and directors do not need to make any immediate changes to their corporate governance systems but should continue to review and update them in the usual way.

Directors (particularly of large businesses) should be aware of the proposed reforms and note that these may change further following the consultation period.

Fieldfisher is continuing to monitor the consultation process and will provide a further update once the government has reported on the outcome of the consultation process.

In the meantime, if you would like assistance with reviewing your corporate governance policies or litigation risk advice, please get in touch.

This article was authored by Donna Goldsworthy, dispute resolution partner and Emma Freudenthal, dispute resolution solicitor at Fieldfisher.
 

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