In response to recent corporate scandals related to misconduct, the Financial Reporting Council (FRC) has taken a proactive step to address confusion surrounding corporate governance and stewardship.

The FRC, as the regulatory body overseeing these areas, has published a comprehensive factsheet to dispel common misconceptions and provide clarity on the duties and responsibilities associated with corporate governance and stewardship.

What are the key takeaways from the FRC’s guidance?

Understanding corporate governance and stewardship

The FRC’s document starts by addressing fundamental questions, such as the meaning of corporate governance and stewardship.

Corporate governance refers to the framework of rules, practices, and processes by which businesses are directed and controlled.

It encompasses the relationship between various stakeholders, including directors, shareholders, employees, and other parties involved in the company’s operations.

Stewardship, on the other hand, refers to the responsible and accountable management of an organisation’s resources and interests.

The voluntary nature of the corporate governance code

One crucial point clarified by the FRC is the voluntary nature of the corporate governance code. The code operates on a “comply or explain” basis, meaning companies are encouraged to adopt its principles but have the flexibility to deviate from them if they provide a high-quality explanation.

It is important to note that the code itself is not legally binding, and the FRC does not possess the authority to take direct action against directors for non-compliance.

Instead, the FRC may engage with companies that fail to comply, offering guidance on how reporting can be improved.

Rejecting box-ticking criticisms

The FRC’s document also addresses a common criticism of the stewardship code, which is often seen as a mere box-ticking exercise.

The FRC refutes this notion and highlights the value of the code as a thoughtful and ongoing process rather than a one-time compliance measure.

The code encourages a comprehensive approach to governance, promoting well-informed investor management and active engagement between investors and companies.

Signatories of the code are required to report annually, demonstrating their continuous efforts to improve their stewardship practices.

The importance of good governance and stewardship

Mark Babington, Executive Director of Regulatory Standards at the FRC, has highlighted the significance of good corporate governance and stewardship for the long-term success and sustainability of businesses.

Effective governance practices:

• Enhance transparency;
• Improve accountability; and
• Instil trust among stakeholders.

By prioritising stewardship, companies can demonstrate their commitment to responsible resource management, while also ensuring effective engagement with investors.

This should, the FRC points out, attract long-term investment and build strong relationships with shareholders.

In the wake of recent corporate scandals, the FRC’s efforts to dispel misconceptions and clarify the expectations and responsibilities surrounding corporate governance and stewardship are useful.

Businesses must recognise the importance of implementing robust governance practices and embracing stewardship principles to ensure long-term success.