'Think for yourself' – FRC chief on the future of corporate governance

Richard Moriarty is the CEO of the Financial Reporting Council (FRC), a role he took up in October 2023 following a 25 year career at various regulatory bodies, including as CEO of the Legal Services Board (LSB) and, most recently, as CEO of the Civil Aviation Authority (CAA).

Richard joined the FRC at a pivotal point in its history. The role and powers of the FRC formed a central part of the government's review of audit and corporate governance in the UK, which had been initiated partly in response to a series of high-profile corporate failures that sent shock waves through the British economy.  The government's review culminated in its May 2022 response paper which confirmed that significant reforms would be implemented to "further strengthen the UK's audit and corporate governance framework and empower shareholders".

Central to these reforms was the creation of the Audit, Reporting and Governance Authority (ARGA) as the successor to the FRC, with enhanced regulatory and enforcement powers. In May 2023, the FRC launched a consultation on amendments to the UK Corporate Governance Code to implement a number of the reform proposals set out in the government's response paper.

Following the announcement of Richard's appointment in July 2023, in October 2023 the government withdrew the draft reporting statutory instrument it had laid before Parliament, which was a key component of the government's confirmed programme of reform.  Then in November 2023, the bill to create the ARGA was omitted from the November 2023 King's Speech and despite the government's assurance that it remained committed to the creation of the ARGA, the status of the reform programme looked uncertain.

Nine months on from the start of his appointment, Gareth Sykes, UK Head of Corporate Governance Advisory at Herbert Smith Freehills, caught up with Richard to talk about his role, his experiences so far and what the future holds for the FRC.

What are your reflections nine months into the role and has it matched the expectations you had when you accepted the appointment? 

There are three main reflections for me. First is our role is really relevant for today's economy in terms of making sure there is a high level of trust and confidence in financial reporting, governance and audit. The second thing for me is I'm really pleased to have landed in an organisation with such committed professionals who want to do the right thing. The third thing is we've got a big book of work to be getting on with. It's an exciting agenda ahead.

There is a lot in common with the themes that we see across the wider regulatory system and a key focus is how we support growth and competitiveness by making sure there's a high degree of trust and confidence in financial reporting and governance. Some of the aspects of that are focussing on the essential not the desirable but most importantly, we should be listening to people and engaging with people. Regulators must have the courage and humility to learn from others.

You joined the FRC following its 2023 consultation on changes to the Governance Code which was one of the largest consultations undertaken by the FRC to date. What were your reflections on that process?

It really brought home the importance of the Governance Code and its relevance – people wanted to engage with us. We heard from thousands of people, both listed and private businesses. There was strong support for the Governance Code as a document – it is only 11 pages and it's principles based; but there was a lot of misunderstanding about what's in the Governance Code. I sometimes think it's the most misunderstood document since the Magna Carta. There was a lot of myth and folklore around it. So we had to do a lot of myth-busting. We consulted on a raft of things that would have been additive to the Governance Code. However, it was important for me to go to what would really make a difference to the quality of governance and drop the other proposals. So we focused on the thing that we thought matters most, which was internal controls.

Were there particular proposals contained in the consultation paper which generated more comment/controversy?

I came to the FRC halfway through the consultation, so this was the biggest thing on day one to get my hands on. There were two areas that caused excitement within the ecosystem. The first was the sheer breadth and scale of the proposals – there were a great number of proposals floated to add to the Governance Code and I think that caused a reaction in a world that was looking at the stock of regulation. It’s important to understand that, even though the Governance Code is only 11 pages long, if you're working for a board or you're on an audit committee, you need to consider a great many other regulations and the stock of that regulation has gone up over time. I'm really sensitive to that point.

The second point which caused reaction was related to internal controls. There was some ambiguity in our language which meant that some confused our intent for introducing a US style Sarbanes-Oxley (SOX) regime, and that was never our intent. So I was really keen to make sure that whatever we did on internal controls, it didn't look like SOX light or SOX by the back door and that it was in keeping with the tradition of the Code which is to be principles based.

What was your reaction when you heard the government was to withdraw the draft corporate governance reporting statutory instrument which would have introduced amongst other things the audit and assurance statement, resilience statement and dividend-related disclosures?

The FRC has a good relationship with all parts of government, albeit we exercise our decision-making in an independent way. I wasn't completely surprised by the withdrawal of the statutory instrument. The government was very keen to see how it sat alongside other work that it was doing which had not concluded. So there was a timing and choreography issue here.

Being candid, there was a reflection that there needed to be a deeper conversation on the stock of governance regulation to support growth and competitiveness and whether we were indeed in the right place. What that did mean was a couple of the proposals put in our consultation at the government's request subsequently fell away because the statutory instrument fell away.

Having published the new edition of the Governance Code, the FRC's attention has now shifted to the Stewardship Code, with the revised code set to be published in early 2025 following the consultation being carried out this year. What have you heard from the initial outreach?

We thought it was important to do a root-and-branch review of the Stewardship Code for three reasons. The first reason was we haven't looked at it for a while and it was important we make sure it's fit for purpose. The second was during the consultation to the Governance Code, we detected there was a desire for a conversation about stewardship as a lot of the responses we got were not related to the Governance Code but related to the general position on stewardship in the UK. Then thirdly, ensuring that we support growth and competitiveness. So there were a number of drivers in that root and branch review.

As for the emerging thoughts at the moment, we're listening. However there are a number of themes emerging. Going back to basics, what is stewardship. We're asking people how it works for them and what they think the key issues are. We need to know what we mean by good stewardship. I think the word stewardship in some conversations has become blurred between the stewardship that investors do for their beneficiaries and the stewardship that boards do for their companies. I think we should all be clearer on that distinction. Another issue that is coming up is related to the rise of passive investing over the past couple of decades and in particular the role of proxy advisors and their much more prominent role in the ecosystem than when the Stewardship Code was first conceived.

Looking to the future, we have an election on the horizon. What will you be pushing for from whichever party forms the next government?

We absolutely do our best to serve the government of the day. But the things that I will always look for is engagement. We will want to meet with and engage whoever's in power to make sure we understand their priorities and it's also to make sure they understand the importance of financial reporting, good governance and its contribution to UK growth and UK PLC.

But in terms of the legislative reform agenda, I am keen to see the FRC's authorities modernised. Partly that's because we are out of kilter with other regulators. We're still too reliant on voluntary funding. And we're still too reliant on our companies providing information on a voluntary basis, which is not sensible when you're doing formal investigation. So both of those issues I think need to be clarified and modernised.

But there's then also a conversation to be had on the back of the White Paper about the scope of our remit, where really the scope of our perimeter has not kept up with the development of how business gets done and capital markets work in the UK. So for instance, we have limited reach into privately owned businesses. A lot of those businesses now are what we would regard as large and in the public interest and some of the cases that have come before parliamentary committees have not been listed companies but privately owned businesses. That's an anomaly that needs to be addressed.

Another anomaly is that because of the historic nature of our powers, where we do spot wrongdoing, we can only take action against members of the accountancy profession. So if you're a CFO or a CEO, that doesn't happen to be a member, you're held to a different standard. This is one of the reasons why I described my role to a Select Committee as being the Sheriff for half the county.

I must ask, do you have insight on when the legislation to create the ARGA will be presented to Parliament?

Look, no one has a crystal ball on this. I would go as far as saying I don't expect major reform in this current Parliament as we're running out of time assuming an election is called in the second half of this year¹. I do believe that the drive for reform will be picked up by a new government of whatever persuasion.

I'm really keen that it's done during peacetime and calm waters. If we have another major failure or another scandal, the risk is there will be a political clamour to legislate and sometimes legislation gets bent out of shape when you're legislating after the event.

What has been the biggest challenge you have faced so far in your new role and what do you expect the biggest challenges will be for the FRC in the coming years?

Our biggest challenge, and I don't say this lightly, is seriously not enough hours in the day, but I won't be the only CEO that has that frustration. There are a number of things where I'm keen to make sure the FRC is well positioned.

Within that ecosystem, we're having the right conversations and we're sharing knowledge and best practice. One of the main topics is the debate about how regulation and growth goes together.  I don't see them as mutually exclusive. I've seen regulatory systems with very high standards that attract capital.

Another challenge is around sustainability assurance and what happens there and reporting on environmental issues. There is an alphabet soup of organisations that have produced rules and guidance in this area. I'm keen to understand what is it that we need for the UK to support both good reporting so shareholders and stakeholders can hold people to account. But this should be done in a way that is proportionate and effective. A question is what does that mean for the market for assurance because we want to avoid greenwashing.

Thirdly, there's the whole issue of AI and technology. Everyone's talking about it. I think it is important that we lean forward with that one.

Then there's the issue as to whether there is a growing gap in access to quality and affordable audit out there. I hear from companies that it is hard to find an auditor, audit fees have gone up, the choice isn't as broad as they would wish. It goes to proportionality, choice and resilience of the market. Then finally, the attractiveness and resilience of the audit profession and making the audit profession an attractive one for the future. As a regulator, we have a role there. If we don't have a vibrant long-term committed, highly ethical and diligent profession - a  diverse one - we've got a problem.

If you had one message or takeaway for those involved in corporate governance at listed companies – whether board members or governance professionals – what would it be?

I'll be slightly provocative here. Three words: think for yourself. I think in corporate governance there is clearly a role for advisers and there's clearly a role to delegate down into the organisation. But it's really important that those in governance roles can think for themselves in terms of key risks, key controls, and how they get assurance.

There's always a risk of too much regulation. With busy non-executives in particular, there is a risk of overreliance on advisers and delegation. So one of my key messages for boards at the moment is think for yourself. And that goes to the point of comply or explain as well. The FRC takes the view that compliance can mean either applying the provisions of the Governance Code as written or setting out a transparent and cogent justification for why you can meet the principles of good governance but don't actually meet the provision.