Here it is, then, six years after the collapse of Carillion: the UK’s response to the massive governance failure at a major government contractor that folded only six months after its first profits warning. From 2026 – so after yet more delay – the boards of quoted companies with a premium listing on the London Stock Exchange will have to declare that their firms’ internal controls are up to scratch.
If this rule change sounds like a watery imitation of what was promised in the aftermath of the Carillion fiasco, you’d be right. Back then, there was a zeal to take radical measures to reform the responsibilities of company directors, as well as to shake up the entire audit industry and the audit regulator, the Financial Reporting Council (FRC). Instead, in terms of what will be required of directors, we’ve ended up with a tweak to the UK corporate governance code.
Companies with a premium listing in London – the only ones to which the code formally applies – already have to carry out an annual review of the effectiveness of their financial, operational, reporting and compliance controls. The new obligation will merely make boards explain how they conducted the review and what it concluded.
The change isn’t nothing, but the contrast with the US is stark. Over there, they have the Sarbanes-Oxley Act, which was introduced within a year of their own spectacular corporate blow-up – at the energy company Enron in 2001. US companies have to involve an external auditor in the review of their controls, which is a more intrusive process, and the act carries criminal sanctions. The UK version, even in tightened form, is less onerous by several degrees.
The lowering of ambition has really been led by the government. Amid the general panic about the “competitiveness” of UK plc and the declining status of the London Stock Exchange as a venue for company listings, anything that can be caricatured as bureaucratic red tape has been downgraded. The government’s mantra these days is to encourage risk-taking and growth. The FRC, in keeping rule changes “proportionate”, is merely following the script.
That same script has already resulted in years of delays to the creation of the Audit, Reporting and Governance Authority (Arga) as a muscular and statutory replacement for the FRC with powers to take enforcement action against all directors, not just – as at present – those who happen to be members of the accounting trade body. The failure to legislate for Arga is all part of the timid tone from Westminster. The corporate lobby has won most of the battles.
An incidental benefit – let’s hope – is that we may see an end to whingeing from boardrooms about the supposedly impossible burdens placed on them by regulators and box-ticking investors. The plea never made much sense given the existence of Sarbanes-Oxley in the US. And it is even less persuasive now that the FRC has also dropped, more justifiably, earlier proposals to beef up reporting on environmental and social areas and the setting of diversity expectations.
For good measure, Richard Moriarty, the chief executive of the FRC, has reminded companies that London’s “comply or explain” principle means what it says: cogent explanations for diverting from the code are allowed, and indeed are better than half-hearted compliance. That bit, at least, sounds like good sense. Company chairs are paid to make decisions and justify them. They should count their blessings: their lives have not been made impossible by regulations.
