In research commissioned by the Financial Reporting Council (FRC), a series of citizen juries were asked what they thought of corporate governance and financial reporting, and were highly critical of the ‘comply or explain’ requirements which mean that the UK Corporate Governance Code is not mandated.  

The independent research, conducted by BritainThinks, involved discussions with members of the public across the country in two-day citizens’ jury events held in London, Edinburgh and Coventry, followed by a workshop. The groups were designed to be totally independent of the profession, and excluded anyone working in accounting or banking.

The research found that there was little awareness and understanding of corporate governance among the majority of participants. Jurors were more familiar with the existence of non-executive directors and the role of a board of directors to some extent, but most had not heard of the UK Corporate Governance Code, nor the FRC’s role.

Across all three juries, participants said that the audit regulator should be given enhanced power and ‘teeth’ to hold companies to account, and that it should have the powers to hold individuals as well as companies to account to prevent non-compliance with the codes and standards. They also said that the regulator should define and operate clearly in the public interest, and ensure that the regulator kept the principle of independence as a key priority.

Awareness of corporate reporting was low among participants overall. While some jurors were aware that companies do produce a public, end of year report, the majority did not know that listed companies are legally required to publish certain information in these annual reports.

Participants noted a number of limitations to corporate reporting as a mechanism for regulating company activity. These included the view that corporate reports are inaccessible for non-expert audiences, including the language used, format and length of annual reports specifically. They also criticised the lack of mandatory reporting requirements for information on environmental sustainability and company values.

In the more granular workshops, participants raised concerns that the Code is applied on a ‘comply or explain’ basis rather than enshrined in law.  This was compounded by the lack definitive metrics and measures to determine levels of compliance, making it harder to implement consistently.

There was a general consensus that the regulator needed to have more powers to take action at companies where there were financial issues at an earlier stage, rather than being reactive to corporate failures.

 Jurors felt that early interventions in the event of any issues arising would help the regulator avoid imposing stricter punishments, by preventing more major issues from developing. There was support for these interventions taking the form of both announced and unannounced ‘Ofsted-style’ inspections. Overall, the citizens juries wanted to see the regulator act as a ‘critical friend’.

As well as more power, participants thought the regulator should hold individuals (other than those who are members of a professional body presently) and companies to account to deter wrongdoing.  One example noted by jurors was that the regulator has no ability to sanction directors who are not accountants, which they felt could mean individual ‘offenders’ may be able to ‘slip through the net’.

They also believed the regulator and companies should operate in the public interest, taking into account the views of wider audiences, including employees, and improve diversity on boards.

The citizens also thought that the regulator should maintain its independence from those it regulates at all costs. Participants felt it was particularly important to ensure the independence of non-executive directors and audit partners from the companies they work with.

Each jury comprised 18-20 members of the public, recruited to reflect the local population and ensure that a broadly representative and diverse sample of the general public were consulted.

The 86-page FRC Citizens’ Juries report is available here