Sarah Rapson: “We are taking the opportunity to bolster the Code where we feel the reporting is weaker.”

Sarah Rapson is deputy CEO and executive director for supervision at the Financial Reporting Council, and is also a NED at both the Royal Free London Group and North Middlesex University Hospital NHS Trusts. Here, Sarah explains what changes are coming to the UK Corporate Governance Code, as well as the gaps in understanding of diversity at the highest levels in UK banks and insurers.

Companies have been following the latest version of the UK Corporate Governance Code for three years now. What is your assessment of the quality of reporting and what changes are you proposing?

The Code was last updated in 2018, following a fundamental and substantial review to add significant emphasis on topics like culture, sustainability, and diversity. We think that, broadly, the Code is working well, promoting best practices, and we have seen improved reporting. However, we are very keen to see more of that evidenced. Now we are consulting on a more limited review of the Corporate Governance Code and will target our changes to the areas identified by the Government in its Audit Reform white paper.

“Broadly, the Code is working well, promoting best practices, and we have seen improved reporting. However, we are very keen to see more of that evidenced.”

Whilst we aren’t opening up the entire Code in our consultation, our proposals relate to two main areas:

1. Firstly, we introduce a new internal controls reporting system, along with improved remuneration reporting on malus and clawback.
2. Secondly, we are taking the opportunity to bolster the Code where we feel the reporting is weaker — for example, there will be a new principle dealing with reporting on actions and outcomes. We want to encourage companies to clearly explain the impact of driving growth and performance in their strategies. This must not be a tick-box exercise — we want companies to report on how their adherence to the Code has helped inform their governance and strategy, as well as in defining their purpose.

Let’s also remember it is “comply or explain”. It’s intended to be proportionate too; it’s entirely reasonable for a company not to follow aspects of the Code so long as the explanation is well made. That won’t change. In fact, we are seeing more and more companies doing exactly that.

The government has asked the FRC to consult on a new internal controls framework. Will this be similar to the Sarbanes-Oxley Act?

Although the government consulted on introducing a regulatory regime similar to that established by the Sarbanes-Oxley Act in the US in 2002, they ultimately decided against that type of regulatory obligation.

Instead, the government has asked the FRC to introduce an internal control reporting system within the Code — so, rather than creating something entirely new, we are building on the existing provisions of the Code within this area. This approach is intended to be proportionate and minimise impact on business.

“Our major changes in this area are around strengthening board accountability on the effectiveness of the risk and internal control framework.”

Our major changes in this area are around strengthening board accountability on the effectiveness of the risk and internal control framework: setting it up, maintaining it, and ensuring it delivers expected outcomes. Directors will then need to make a declaration stating the effectiveness of that system and report on any weaknesses found.

What role should nominations committee chairs play in choosing leaders whose values match those needed to ensure business is a force for good?

Nominations committees and their chairs play a vital role in considering the future makeup of the board through effective succession planning and identifying the skills, backgrounds, and experience the board will need for the future. We’re pleased to see that FTSE 350 boards are making progress on increasing the diversity of their membership, but there is always more to do in this area.

We’ve seen nominations committees being instrumental in ensuring that recruiters widen their searches to diverse talent pools and supporting candidates from non-traditional backgrounds through the reporting process. We would like to see greater reporting on this area so that the nominations committee is seen as being just as important as the remuneration and audit committees.

“We would like to see greater reporting on this area so that the nominations committee is seen as being just as important as the remuneration and audit committees.”

It’s important to note that diversity does not just equate to ensuring gender diversity on boards. As Director of Authorisations at the FCA I was responsible for the Senior Manager Regime, and I would regularly interview the most senior people in financial services, including chairs at large UK banks and insurers among others. Invariably, whenever I asked a question on diversity and inclusion, the answers I got were very positive; they were proud of the work they’d done on gender diversity and could speak eloquently about it. However, no-one said very much about diversity in a wider sense, be it race equity, social mobility, disability, or otherwise. I sensed that they hadn’t really understood the broad spectrum of diversity, and it highlighted for me the fact that there is a great deal more to do to deliver on diversity at board level.

What is the most defining moment of your career that led you to where you are today?

Ten years ago, I was appointed as director general for the UK Visas and Immigration Office (UKVI). This was just after Theresa May, as home secretary, had described the UK Borders Agency as closed, secretive, and defensive before splitting it into two to create UKVI. In my first month, I was summoned to give evidence at two parliamentary select committees on the same day. I was still getting to grips with the complexity of my remit and had to prepare for parliamentary scrutiny on a highly politically charged issue.

This was when I learned that I had the resilience to handle intense public and parliamentary scrutiny — and when facing challenges since then I have often thought back to how I felt that day and reminded myself that if I was able to do that then little else should faze me now.

Which female leader have you worked with who has inspired you? Why?

I met Dame Sharon White DBE when she was second permanent secretary at HM Treasury. Not only is she superbly talented and a great communicator, but she was also all about the people and the importance of having a vision for staff. She taught me the difference between mentorship and sponsorship; I knew she was sponsoring me when I wasn’t there in the room by talking positively about me and putting me forward for things. I found her determination to make the most of talent and to ensure that people reach their potential to be truly inspiring.

Do you have any Golden Rule you try to follow?

Always be open and honest with colleagues.

This is especially critical during times of organisational change. Even if the news is bad, treating people maturely and with honesty can do a lot to assuage anxieties; and, if you don’t know the answer to something, say so and indicate when you will return with it.

“Treating people maturely and with honesty can do a lot to assuage anxieties.”

When I was chief executive at the Passport Office, I had to close a number of offices. My key takeaway from that experience was that being open and honest about the realities — and opportunities — inherent in any change project is vital to its success going forward.