Faculty of law blogs / UNIVERSITY OF OXFORD

Comments on the FRC’s 2023 Corporate Governance Code Consultation


Time to read

4 Minutes


Iain G MacNeil
Alexander Stone Chair of Commercial Law, University of Glasgow
Irene-marie Esser
Professor of Corporate Law and Governance, University of Glasgow, and Extraordinary Professor, Stellenbosch University
Katarzyna Chalaczkiewicz-Ladna
Lecturer in Commercial Law at the University of Glasgow

Based on the FRC’s public consultation on the proposed revision to the Corporate Governance Code launched in May 2023, the below note deals with some comments relating to (i) corporate reporting; (ii) the notions of corporate purpose and corporate culture; (iii) board committees; and (iv) improving the functioning of comply or explain.

The FRC’s consultation focusses on outcomes-based reporting. The proposed new Principle D of the Code emphasises that reporting should demonstrate the outcomes of governance activities, where possible, and not just establishing the policies. Our empirical research clearly shows that this is an area where improvement is needed. First, we observed high levels of compliancewhen it comes to the strategic reporting provisions of the Companies Act 2006. The main conclusion in Part 2 of our empirical study on strategic reporting was that the interviewees (various stakeholders) did not believe their interests matter in the context of corporate decision-making. Participants argued strongly that disclosure of non-financial information is not enough, and stakeholder engagement methods are needed. We also argued that the non-financial reporting requirements are complex , and the goal should be to simplify it and to make it more transparent. Non-financial reporting is not specifically included under this consultation, but Principle D is a step in the right direction. We argued that disclosure and reporting are useful mechanisms in the context of stakeholder protection, it informs stakeholders and increases transparency, but it does not normally lead to better engagement and outcomes. We therefore conducted a study on the implementation of the Code 2018 Provision 5 workforce engagement tools (see here and here). We found that the engagement tools are implemented, but our research did not find much evidence of how workforce interests are integrated into decision-making or strategy, nor is there much evidence that such considerations changed outcomes relative to what they would have otherwise been.


It is interesting to note, in the context of reporting, that this consultation introduces, for the first time, ESG concerns. However, a bit more clarity on the meaning of ESG objectives would be welcome as this is not dealt with in the Code. Also, the introduction of ESG factors into the Code might be seen as recognition of the financial model of ESG—ie, more a matter for investors than companies through board decision-making. As we argued in a different piece, the financial model of ESG investing is now the standard approach around the world and is reflected in ESG ratings, codes and guidance and regulatory rules. It focuses on the role of capital and investors in driving change in sustainability practices and pays much less attention to the role of board decision-making and directors’ fiduciary duties. We proposed a model that locates accountability more clearly with the board, focusing on internal decision-making.

With regards to corporate purpose and corporate culture, these notions are present in the Code but did not attract much scrutiny in the consultation. Corporate purpose has emerged in recent years as a key issue in connection with the role of corporate governance in the transition towards sustainability. Corporate culture, on the other hand, refers to the shared values, attitudes and behaviours that characterise an enterprise. In our paper on corporate purpose we argue that the focus should not be on defining purpose but rather on adjusting the levers of corporate purpose (which we identify as capital, profit and governance) as incremental change is more realistic than transformational change. In other words, there is no need to make changes to corporate purpose (eg, through the articles of association) or to reform directors’ duties, if other mechanisms are in place the outcomes will ultimately drive the purpose. Arguably, in a similar vein, corporate culture—which is usually shaped by management—does not need a static definition. It will follow if other corporate governance mechanisms are in place.

Moving now to board committees, the FRC decided against having a mandatory sustainability committee. Irrespective of the title of these committees, we are of the view that to improve sustainability reporting, there should be a shift from a disclosure focus to engagement with various stakeholders. To achieve this goal, a committee—or another body—focusing on sustainability and stakeholder engagement, should be mandatory for some companies. For instance, in our 2018 article we suggested combining an advisory stakeholder panel (including representation from the workforce) and a designated non-executive director (NED) representing all stakeholders. The stakeholder panel could meet outside the board and report to the board through a designated NED. This could be a route to get the views of all stakeholders heard at board level.

The consultation also deals with ‘the remit of audit committees’ and whether it ‘should be expanded to include narrative reporting, including sustainability reporting, and where appropriate ESG metrics, where such matters are not reserved for the board.’ In our view, the audit committee is the right forum to have oversight on all these issues. However, as argued earlier, disclosure on its own is not sufficient and stakeholder engagement is required.

Finally, when it comes to the ‘comply or explain’ approach, the newly drafted Principle D reiterates the ‘comply or explain’ nature of the Code’s Provisions, but the Code adopts an ‘apply or explain’ approach for the high-level Principles. We support the Code as a soft law instrument. Flexibility is a core feature of the ‘comply or explain’ principle, hence, compliance is left to the discretion of companies. Our empirical research on the implementation of the Provision 5 workforce engagement tools however shows that the ‘comply’ element of the ‘comply or explain’ principle is not particularly effective. Despite the breadth of data, in some cases it was still not straightforward to understand how workforce engagement tools work. The ‘comply’ element provides little or no contextual information on how the option works in the specific corporate and governance setting. The ‘explain’ option appears to operate more effectively in connection with Provision 5 than the ‘comply’ option as a disclosure mechanism. In our view ‘apply and explain’ would be more appropriate for the Code’s provisions as it requires a company to adopt the spirit of the Code more comprehensively and, where applicable, explains why it departs from it, it therefore goes further than ‘apply or explain’. The ‘apply and explain’ approach would furthermore align the Code with the  Stewardship Code and the Wates Large Private Companies Principles working on an ‘apply and explain’ basis. This could also assist in reducing boilerplate statements and achieving ‘outcomes-based reporting’ which the FRC concentrates on in its consultation.

Iain MacNeil is the Alexander Stone Chair of Commercial Law at the University of Glasgow and Head of the Corporate & Financial Law Research Group.

Irene-marie Esser is Professor of Corporate Law and Governance at the University of Glasgow and Extraordinary Professor at Stellenbosch University.

Katarzyna Chalaczkiewicz-Ladna is a Lecturer in Commercial Law at the University of Glasgow.



With the support of