The UK’s Financial Reporting Council (FRC) recently signalled a shift in its approach toward regulatory reporting, moving toward a model that encourages active, meaningful engagement with corporate governance principles. This evolution takes the focus away from procedural adherence for firms, reflecting a broader and more nuanced view of how responsible risk-taking is integrated into compliance and reporting frameworks.
Shifting Regulatory Strategy: Supporting Growth and Responsible Risk
Regulators like the FRC are recalibrating their strategy with the goal of ensuring corporate governance frameworks actively support economic growth, innovation and investor confidence without diluting oversight. This involves encouraging companies to embrace responsible risk-taking on the understanding that a dynamic economy often requires businesses to move beyond overly cautious boundaries. The FRC’s evolving stance demonstrates a move away from the perception of regulation as a constraint and instead considers it a facilitator of robust, well-governed enterprises. Firms are therefore encouraged to pursue operational excellence and long-term value through a nuanced approach to mitigating regulatory risk. This move away from prescriptive rules for the sake of rules fosters a culture of responsible governance and sustainable long-term growth.
Provision 29 and the Evolution of “Comply or Explain”
Within the FRC’s Corporate Governance Code, Provision 29 emphasises a strategic shift that reframes regulatory compliance in a unique way. Boards are encouraged to describe their engagement with risk, compliance and internal audit functions, building upon a long-standing principle known as “comply or explain”. The FRC would like companies to genuinely explain the reasons for any deviations from compliance with specific code provisions and expects them to articulate a clear and context-specific rationale. This rationale should demonstrate how their alternative approach better serves the interest of the business, its stakeholders and society at large, moving beyond a simple compliance checklist. Firms are enabled to think critically about what constitutes effective governance for their unique circumstances.
How Can Firms Foster a Deeper Understanding of Regulatory Strategy
This evolving regulatory philosophy underscores that compliance should not be a superficial, tick-box exercise. Engagement with the Corporate Governance Code should be a catalyst for senior management and boards to deepen their understanding of their own organisations. By thoughtfully considering and explaining any departures from the Code’s principles, leadership teams can develop deeper insights into their operational structures, risk landscapes and cultural dynamics. There are several proactive measures that firms can take to move towards this strategy. These include dedicating time to analyse the FRC’s wider communications such as thematic reviews, speeches and consultation papers which often reveal the direction and intent behind specific provisions. Board-level discussions should focus on the intent behind the Code’s provisions, rather than treating them as box-ticking obligations. An enhanced understanding of regulatory strategy can inform decision-making while still focusing on long-term strategy and operational excellence. Boards should be committed to understanding this intent, engaging in industry dialogues on emerging trends and enhancing their communications based on these changes. The FRC is focused on ensuring that governance practices are meaningful and contribute to the resilience and strategic success of the firm.
How Can Firms Avoid a Culture of Blame?
An important element in this regulatory evolution is the focus on moving beyond a “blame culture” where every misstep does not automatically lead to punitive outcomes and instead encourages constructive dialogue and course correction. Accountability must remain paramount, but an overemphasis on assigning blame for every instance of non-compliance can stifle innovation and discourage transparency and open dialogue. The FRC aims to foster a system where regulatory interactions can serve as learning opportunities and firms should take advantage of this opportunity. Engaging early and often with regulators allows for continuous improvements of governance practices while remaining in alignment with the evolving regulatory framework. This proactive approach helps firms stay ahead of regulatory expectations in a dynamic economic landscape.
Contact us today to learn more about how Novatus Global can support you in responding to the evolution of regulatory strategy.
