Updated UK corporate governance code will draw on treasurers’ skills

The revised UK Corporate Governance Code has implications for treasurers. Here, Gurdip Dhami provides an overview of the main points

On 16 July 2018, the Financial Reporting Council (FRC) published an updated version of The UK Corporate Governance Code (the Code), along with the revised Guidance on Board Effectiveness, which provides further details and guidance on the Code, including questions for boards to consider. A supporting document, Revised UK Corporate Governance Code 2018 highlights, was also released, which provides a broad overview of the Code.

The Code applies to all companies with a premium listing and for accounting periods commencing on or after 1 January 2019, although some companies may choose to adopt certain parts early. As the Code contains best practice for corporate governance, other listed or unlisted companies may wish to adopt the Code in whole or in part.

A brief overview of the Code

The purpose of this note is to provide a brief overview of the Code and to highlight the sections on risk management, since these are likely to be more relevant to treasury professionals in their day-to-day activities.

It has been more than 25 years since The UK Corporate Governance Code was published in 1992 by the Cadbury Committee. It defined corporate governance as ‘the system by which companies are directed and controlled’. The updated Code is shorter and more concise than the previous one and includes changes or additions in the following areas: the concept of company purpose, stakeholder engagement (including workforce), corporate culture, diversity, succession planning and remuneration.

Additionally, as discussed below, the concept of ‘emerging risks’ has been introduced.

The Code is composed of 18 Principles and 41 more detailed Provisions grouped into five sections:

1. Board leadership and company purpose
2. Division of responsibilities
3. Composition, succession and evaluation
4. Audit, risk and internal control; and
5. Remuneration.

The application of the Code Principles and Provisions is publicly reported by the company – the Provisions operate on a ‘comply or explain’ basis, providing companies with flexibility.

The fourth section of the Code, ‘Audit, risk and internal control’, is likely to be of most relevance to treasury professionals because part of it relates to risk management. Relevant extracts are reproduced below:

• Principle O: “The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.”
• Provision 28: “The board should carry out a robust assessment of the company’s emerging and principal risks. The board should confirm in the annual report that it has completed this assessment, including a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.”
• Provision 29: “The board should monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness and report on that review in the annual report. The monitoring and review should cover all material controls, including financial, operational and compliance controls.”

The FRC defines principal risks in the following way: “Principal risks should include, but are not necessarily limited to, those risks that could result in events or circumstances that might threaten the entity’s business model, future performance, solvency or liquidity. In determining which risks are the principal risks, entities should consider the potential impact and probability of the related events or circumstances arising, and the timescale over which they may occur.”

How treasurers can assist the board

Although the Code is directed at the board of directors, it is likely that the treasury function will assist the board in its application in some of the following ways:

• As required by Provision 28, treasury risks, such as liquidity, interest rate, funding, FX, counterparty, etc, will need to be identified and assessed. Treasury risks that are deemed to be ‘principal risks’ will be reported by the company along with the principal risks identified and managed by other parts of the company.
• Assess emerging risks as required by Provision 28. This is an addition to the Code, and some treasury functions may need to set up new processes to comply.
• Address the requirement stated in Principle O to “determine the nature and extent of the principal risks the company is willing to take”. This is also commonly known as risk appetite. For example, it would usually be the responsibility of the treasury function to recommend the level of liquidity risk and interest rate risk that is acceptable given the company profile, strategy and external environment of the company. The recommendation would ultimately be approved by the board.
• As required by Provision 28, explain how treasury risks are managed or mitigated. If relevant, this would include a description of hedging strategies.
• Carry out a review at least annually of the effectiveness of the risk management and internal control systems within treasury as required by Provision 29. In practice, it is likely that most companies and their treasury functions will carry out a more frequent review (for example, quarterly) and this would include a review of the effectiveness of key controls used to manage treasury risks.

Overall, the Code places an emphasis on building trust and strong relationships between companies and key stakeholders (which could include bondholders and bank loan providers). Treasurers will play a role in this regard by virtue of their professional expertise and skills to bear.

About the author

Gurdip Dhami is a treasury consultant and ACT member