The Financial Reporting Council (FRC) still requires an upgrade to set high standards for UK corporate governance, according to the watchdog’s CEO, Richard Moriarty.

Speaking at Chartered Accountants’ Hall on 5 March, Moriarty told ICAEW Chief Executive Michael Izza that he backs moves to refresh the FRC, despite concerns that the government’s will to reach the finish line has stalled. While the finance sector has eagerly awaited the body’s long-planned transition into the Auditing, Reporting and Governance Authority (ARGA), the November King’s Speech included no time for MPs to discuss the required legislation.

Fundamental changes

“I would argue strongly that we do need ARGA,” Moriarty said in a talk with Izza as part of ICAEW’s annual Corporate Governance Conference. “In terms of public interest, there are two parts of our modernisation that resonate with politicians, the public and businesses. One is that our powers at the moment are limited only to members of the profession. And I think there’s a very good argument that they should be broadened to other directors.

“I think those people, communities and commercial partners who have suffered painful consequences as a result of a significant corporate failure find it frankly bizarre that responsible directors are held to a much lower standard, and are outside our regulatory purview, just because they happen to not be members of an accounting professional body.”

The second area where Moriarty thinks the FRC should modernise, to keep up with the changing landscape of corporate UK, is its purview over private equity-backed businesses. “A lot of our powers rest with listed equity,” he said. “But of course, we’ve seen fundamental changes in the corporate investment mindset over the past 20 to 30 years and a lot of large businesses that might be regarded as of public interest are now privately owned – for example, water and energy companies.”

Perhaps most crucially, Moriarty – former head of the Civil Aviation Authority – stressed that the basics of the FRC’s regulatory tools must be brought into line with those of other watchdogs. “I come from a place where some of this stuff is bread and butter,” he said, “but the FRC doesn’t have it. For instance, our ability to obtain information is really important, but our powers are limited. And so is our ability to have a statutory rather than voluntary funding base.”

Now into the sixth month of his tenure, Moriarty said: “Having looked at our progress and plans for the future, my own view is that this is much more about modernising the FRC, rather than just ‘replacing it with ARGA’. The actual brand name I’m entirely relaxed about, but I’m keen to pursue with parliamentarians an effort to modernise our powers because I do think it will bring our scope into line with modern business and public expectations.”

Shared endeavour

Despite that prevailing need for an upgrade, Moriarty is confident that the FRC is a different beast to the one described in the 2018 Kingman review, a report that Izza said he still reads at least once a year.

“We’ve come an enormously long way in the past four or five years,” Moriarty said. “The area which is really important is our core block of regulatory oversight – something that John Kingman found was lacking. If you look at the work that’s gone on internally, plus our supervision and the quality of audit over the past four to five years, the picture is now much better.”

However, he was quick to state that the FRC could not claim sole credit. Rather, professional bodies – and the profession itself – have worked alongside the regulator as part of a “shared endeavour” to respond to the issues Kingman highlighted. “Is it perfect?” Moriarty asked. “Probably not. Can it be improved? I’m sure it can be.”

Landing the message

As Izza turned to January’s revisions to the Corporate Governance Code, Moriarty zeroed in on the delicate topic of ‘comply or explain’. This had surfaced in the initial consultation and is an area that has benefited from his fresh pair of eyes as the FRC’s new CEO. His stance on the issue echoed throughout the event’s subsequent panel talks.

Moriarty pointed out: “I was getting a lot of feedback, particularly from boards, audit committees and committee chairs, along the lines of: ‘Richard, it’s really difficult for us to file an explanation. There is safety in the crowd. We don’t like standing out.’

“I found that quite intriguing. The FRC view is clear that compliance can mean either applying the provisions of the Code, or setting out a clear, transparent justification for why that is not appropriate in the company’s circumstances, but where the company can still promote the principle of good governance through a different route.”

While the FRC is “quite relaxed” about the route businesses take, Moriarty said, he was seeing lots of conservatism and caution over the prospect of taking the latter path. “I was really keen to understand this. I think it’s partly to do with it not having landed that this is indeed our view, and partly to do with natural risk aversion on the part of boards about standing out. And partly due to the influence of proxy advisers. So, I’m really keen to get the message across.”

He stressed: “This is something we need to do, working with proxy advisers and others, just to give boards a bit more confidence. My own view is that setting out a quality explanation can actually constitute better governance than blindly applying a provision of the Code, in circumstances where the former is much better suited to supporting the success of the business – and where doing so can still meet the principle of the Code.”