16/09/2014-U.K. Steps Up Rules on Corporate Governance

British listed companies will have to make a broader statement of their long-term viability under controversial changes to corporate governance rules to be unveiled Wednesday.
The reforms, which came under heavy criticism during consultation, will require a board to go beyond the current statement that a company is a “going concern” and has enough cash or access to capital to survive for the next 12 months.
Under the updated U.K. Corporate Governance Code, directors will also have to state whether they believe their company will be viable for a longer period and assess the principal risks it faces.
Stephen Haddrill, chief executive of the Financial Reporting Council, which oversees the code, said: “The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation.” U.K. listed companies will be required to make the new assessments or give reason for not doing under the “comply or explain” rules.
The changes implement reforms proposed by Colin Sharman, former chairman of KPMG International, who was asked to consider the going concern statement and liquidity risks following the financial crisis. This saw banks being bailed out by taxpayers shortly after their auditors and boards gave them a clean bill of health.
Critics of the changes have pointed out that the collapses came so quickly after the last accounts that requiring boards to give a longer term assessment could hardly have made any difference.
Opponents, such as the Institute of Directors, have also ridiculed the idea that directors should become “crystal-ball gazers” while Jon Moulton, a leading British private equity investor, has bemoaned the constant stream of new requirements that make company reports ever bigger and more unreadable.
To be fair to the supporters, they would acknowledge the risk that the new procedures will merely add a further round of box-ticking and make reports even more unwieldy. Nor do they claim that the changes would have stopped banks going into the credit crunch with inadequate liquidity.
They would also no doubt argue that it does not seem unreasonable to ask boards to assess longer term viability and clearly articulate the principal risks to investors, and encourage them to have the sort of discussions investors might hope they were having anyway.
The update to the rules comes just days after the collapse of Phones 4u, which called in the administrators this week. Backers of the latest move said it was conceivable that had the company, which is not listed, been required to focus more on the principal risks it faced, bondholders would not have lost so much money from its collapse.
Source: The Wall Street Journal