Essential Corporate News: Week ending May 28, 2021

FRC: Workforce engagement and the UK Corporate Governance Code - A review of corporate reporting and practice

On May 24, 2021 the Financial Reporting Council (FRC) published the results of research into how FTSE 350 companies are meeting the requirements in the 2018 Corporate Governance Code (2018 Code) for boards to ensure effective workforce engagement and report on that engagement. The report notes that many FTSE 350 annual reports still appear to downplay the importance of workforce engagement, in many cases relegating it to boilerplate language in a formulaic table of stakeholders. However, it also noted that there is a great deal of innovation and fresh thinking in this area, as exemplified by the pockets of good practice referred to in the report.

The report explores the approaches companies have taken to providing a workforce voice in the boardroom, why different approaches have been chosen, what these changes have meant in practice and how effective they have been from both a management and workforce perspective.

Of the three core options for workforce engagement in the 2018 Code – a worker director, designated non-executive director (NED) and advisory panel – the report notes that 68 per cent of companies in the sample have adopted one or more of these as a direct consequence of the 2018 Code (40 per cent have appointed a designated NED, 12 per cent have established an advisory panel and 16 per cent have combined an advisory panel with a designated NED). Only one company was found to have appointed a worker director following the issuance of the 2018 Code (with four FTSE 350 companies having had worker directors prior to the 2018 Code). The remaining 32 per cent of FTSE 350 firms examined have not adopted any of the three suggested options in Provision 5 of the 2018 Code, instead either choosing to adopt ‘alternative arrangements’ or claiming that their existing engagement mechanisms are adequate to satisfy the 2018 Code’s requirements. The report notes that while some of this group have longstanding and effective structures for workforce engagement developed over several years, others rely heavily on staff surveys combined with ad hoc forms of informal engagement such as site visits.

The report sets out a number of key lessons companies should give particular thought to and these include:

• Representativeness and breadth of coverage – ensuring that the employee voice reflects the geography and demography of the workforce. Voice mechanisms need to be adapted to ensure they can reach across the breadth of company structures and hierarchies. Minority groups can be underrepresented, which can cause a serious skew in the views heard by the board.
• Different voice channels need to be well integrated with one another, so depth of coverage is also crucial – ensuring that worker directors, NEDs and advisory panels are both well aligned with each other as well as with staff surveys and other general HR and engagement practices. At the same time, board-level engagement practices should not cut across core trade union activities, but can beneficially include trade unions while still respecting their parallel role.
• The board-level engagement mechanism, whatever its form, needs to allow for regular input from the workforce, so frequency is important too, and particularly in response to rapid changes in circumstances, such as those presented by COVID-19 during the past 12 months.
• Workforce representatives, whether sitting on a panel or as worker directors, should be chosen with some input from the workforce. This can mean direct election, or indirect election through lower tiers of workplace forums. Even in cases where management might think they have good reasons to appoint workforce representatives themselves, there are ways to secure workforce input into this decision through nominations or consultations.
• Energies should be focused principally on the substance of workforce engagement, not the process. Initiatives should be developed not merely in order to tick a box in response to a 2018 Code provision, but rather as a means to fully embed the voices and concerns of workers in boardroom deliberations, and in turn to see these reflected in management policy outcomes.
• Agenda setting, either for panels or for consultation meetings between NEDs and the workforce, is best when there is a balance between topics of management interest and topics of workforce interest. Board representatives should be prepared to both ask and answer questions, in order to promote two-way dialogue.
• A meaningful dialogue with the workforce also requires an effective feedback loop, whereby employees are properly informed about the relevant issues before being asked for their feedback, and the results of that employee voice are in turn communicated back to the workforce in a clear and consistent manner.

(FRC: Workforce engagement and the UK Corporate Governance Code – A review of corporate reporting and practice, 24.05.2021)

Parliament: International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021

The International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 came into force on May 22, 2021. They delegate certain functions of the Secretary of State, relating to the adoption of international accounting standards (or IFRS) for use within the UK. The functions are delegated to the UK Accounting Standards Endorsement Board (“UKEB”). The UKEB will be responsible for the adoption of international accounting standards for use within the UK.

The functions were originally conferred on the Secretary of State by Chapter 3 of Part 2 of The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019, to replace the framework for the adoption of international accounting standards by the European Commission within the EU following the end of the transition period.

The UKEB’s website contains information on the UKEB’s intended functions. The UKEB will influence, endorse and adopt new or amended international accounting standards issued by the International Accounting Standards Board (IASB) for use by UK companies. The website also hosts the text of UK-adopted international accounting standards. The intention is that the website becomes the hub for all matters relating to UK endorsement and adoption of IFRS.

The Financial Reporting Council (FRC) announced the UKEB’s new delegated functions on May 26, 2021.

(The International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 and Explanatory Memorandum)

FRC: UK Electronic - Reporting FRC Lab Survey

On May 26, 2021 the Financial Reporting Council (FRC) announced that its Financial Reporting Lab is conducting a survey to understand the readiness of companies and providers for the publication of annual reports in XHTML format for 2021, as well as the experiences of those who have already trailed or published XHTML annual reports.

In 2020 the FCA delayed the mandation of Disclosure and Transparency Rule 4.1.14, which introduced a requirement for companies on a regulated market to publish annual reports in XHTML format. The majority of companies opted not to produce XHTML accounts for 2020, although a number did. The Lab is also keen to hear from investors and other potential users of the data.

The online survey needs to be completed by June 25, 2021.

(FRC, UK Electronic Reporting - FRC Lab Survey, 26.05.2021)

FRC: FRC issues revised auditing standard for the auditor’s responsibilities relating to fraud

On May 27, 2021 the Financial Reporting Council (FRC) announced the publication of a revision of its UK auditing standard on the responsibilities of auditors relating to fraud - ISA (UK) 240 (Revised May 2021) - The Auditor's responsibilities Relating to Fraud in an Audit of Financial Statements.

The revisions to the standard are designed to provide increased clarity as to the auditor's obligations, addressing the concern raised by Sir Donald Brydon in his review of the quality and effectiveness of audit. The revisions include enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks.

The revised UK standard is effective for audits of periods beginning on or after December 15, 2021 with early adoption permitted.

The FRC notes that the Department for Business, Energy and Industrial Strategy (BEIS) is currently consulting on proposals to restore trust in audit and corporate governance, including statutory requirements for directors to report on the steps they have taken to prevent and detect material fraud and for auditors to report in relation to such a director's statement. The FRC will address these proposals in due course, taking account of the outcome of the BEIS consultation.

(FRC, FRC issues revised auditing standard for the auditor’s responsibilities relating to fraud, 27.05.2021)