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Find back copies our eBulletin The Effective Board here – along with our other thought pieces on risk, assurance and culture.
The Effective Board – The new Code (again): Spotlight on the Principles
In last month’s bulletin we looked at some of the changes to the Code which are kicking in next year – and how boards might get value from responding to the new requirements. But we didn’t go into detail on a major change in the expectations around the Principles: this is in fact a fundamental shift that could have a wide-ranging impact on how boards work.
A lot of what follows refers to the detailed wording of the Code, so we’re at risk of being accused of writing for “governance geeks”! (But this is no doubt a large proportion of our readership…) Even though it might be a bit dry, this really is a shift that all directors need to absorb. We are focusing deliberately here on the Annual Report – but some things will need to change if you’re to have a good story to tell.
“Comply or explain” is often referred to as the basis of the Code – but this has only ever been (and continues to be) the case for the Provisions. For the Main Principles, board have been expected to apply them and report on how they did so. But the new Code has shifted the balance. As the FRC states: “the 2018 Code focuses on the application of the Principles” p2) and these are “at the heart of this Code” (p1). The Supporting Principles have gone – and the Principles are given a stronger emphasis. And, crucially, the expectations of how boards explain the way they go about applying the Principles represents a seismic shift (if it’s not over the top to attach this term to corporate governance). Boards need to consider the implications carefully. Here we share a few thoughts on what “good practice” might look like, and what boards might aim to do – and responses that should be avoided, no matter how strong the temptation to succumb to the hope that not much has changed.
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