CORPORATE GOVERNANCE BOARD DECISIONS PCRUCIATTI / SHUTTERSTOCK Updates to the FRCs UK Corporate Governance Code and new Guidance on Risk Management, Internal Control and Related Financial and Business Reporting make companies more accountable to shareholders, but they also mean a more risk-based approach is required at board level. Lynn Strongin Dodds assesses the implications for risk professionals S hareholder activism is on the rise in Europe, but the jury is out as to whether the Financial Reporting Councils (FRC) alterations of the UK Corporate Governance Code, as well as the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, will add to their armoury. It will make companies more accountable to all their stakeholders but some argue that the armoury has always been there. In fact, a study conducted by Skadden and Arps found that the financial crisis has been one of the triggers behind the 62 per cent hike in global shareholder campaigns since 2010. US hedge funds have typically been the predominant protagonists, but in the last seven years institutional investors have joined the fray, targeting larger companies across a wider range of sectors. Their common complaints include relative underperformance; change in strategic direction; capital allocation; balance sheets; remuneration; returns policies; and corporate governance. By contrast, their European and UK counterparts have shied away from public admonishments, preferring to engage in a series of dialogues to alter, as well as get, a better grasp of company behaviour. This was mainly due to the fragmented nature of the region in terms of myriad local regulations, European Union directives and local stock market rules. More vocal However, since 2008 there have been a number of examples of asset managers becoming more vocal most notably Monaco-based Knight Vinke Asset Management helping to overhaul strategy at French appliances retailer Darty, where it gained a board seat in 2013, as well as its campaign at UBS to hive off the groups investment banking unit. In addition, the Childrens Investment Fund a well-known European-based activist hedge fund run by Chris Hohn built a public case for European aerospace company Airbus (formerly known as EADS) to sell its stake in rival Dassault Aviation. The new regime is an update of both the 2004 and 2012 corporate governance codes, as well as the 1999 Turnbull Report on internal controls. It requires boards to create a more open and transparent dialogue about the key risks, long-term health and strategy of their companies. Management are also obliged to issue a so-called viability statement that provides a broader assessment of a companys long-term solvency and liquidity, and to conduct ongoing monitoring of their risk management and internal control systems. They will also have to state whether they will be able to continue to operate and meet their liabilities in a set timeframe. Moreover, if a significant proportion of shareholder votes have been cast against a resolution at any general meeting, companies need to explain what action will be undertaken to identify the reasons for the results. I would not get over-excited about the code changes, and doubt they will make a great deal of difference in terms of shareholder activism, as they do not represent a significant change to what is already required, says Mark Butterworth, managing director of risk consultancy Condie and past chairman of IRM. The latest corporate governance code is an update of the 2012 version. However, he adds that the 2014 guidance on risk management is more detailed and challenging than preceding publications and requires boards to adopt a much more risk-based approach, according to Butterworth. It is more than just a checklist of performance and behaviour, and shareholders can hold the board to account to a greater extent than previously, he adds. Jim Sutcliffe, consultant and former chairman of the Codes and Standards Committee of the FRC echoes these sentiments. I do not see this as a great turning point but as another brick in the wall. The Turnbull Report, for example, was based on internal controls, but the recent revisions in the code are to promote better discussions between the company and all of its stakeholders, including shareholders. It is to ensure that they are well informed and understand what they are paying for. John Scott, the chief risk officer for Zurich Global Corporate, also believes the recent edition last September is part of the evolution that started 20 years ago. I am not sure it gives shareholders more tools, but the code better aligns their interests as well as other stakeholders such as employees and customers with those of management. It is also a realisation that there needs to be a dedicated risk manager at the board level who can identify the risks, determine the risk appetite which will depend on a companys objectives mitigate and manage the risks across the organisation. Scotts view is underscored by the findings in the recent report Tomorrows Risk Leadership: delivering risk resilience and business performance by London-based global business think tank Tomorrows Company, in collaboration with the Good Governance Forum members, Airmic, CIMA, IHG, Korn Ferry, PwC and Zurich. It recommended that companies appoint an executive risk leader to navigate todays increasingly complex world, because if they didnt, they could fall prey to the next big crisis. Top table This could open the door of opportunities for risk professionals who want a more tactical role in a company. All too often, according to the report, risks are managed on a siloed basis, detached from a companys strategy. A risk executive whether it is called a chief risk officer or something else would provide a corporate-wide view and help boards to cut through the vast amount of risk information and focus on the most important risks. The Tomorrows Company report puts the risk executive at the top table, because organisations need to look more at the future than at the past if they want to create long term sustainable organisations, says Richard Anderson, director at AndersonRisk, a risk management, assurance and governance consulting business and director at IRM. There needs to be a thorough understanding of the strategic, tactical and operational risks, and this should underpin the decision-making process throughout an organisation. The best way to do this is through a risk appetite mechanism, which I believe needs a good understanding of the risk culture. Peter Bonisch, managing director of Paradigm Risk Consulting, adds: I do not think that the revisions upgrade the tools of the shareholder, but those of the corporate officer. The guidance expects them to understand better the strategic issues and assumptions, run analyses, and explain the analysis through the decision-making process. One of the key issues is that there are relatively few people who are trained to do this. Boards need to find better tools and more numerate risk people who are better communicators, so that they can think about the dark corners of the potential outcomes. Boards need to find better tools and more numerate risk people who are better communicators so that they can think about the dark corners of the potential outcomes