Andrew Milne

In a March 2021 paper entitled “Restoring trust in audit and corporate governance” (here), the UK government set out a number of proposed reforms in order to try to increase trust in corporate governance, including, among other things, proposed new company reporting requirements. In the following guest post, Andrew Milne discusses the potential implications for UK directors from the reform proposals under consideration. Andrew is a Senior Associate at the CMS law firm, and a co-author of the UK Chapter in Directors’ Liability and Indemnification. I would like to thank Andrew for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Andrew’s article.




High profile corporate failures have raised concerns about UK corporate reporting. The UK Government has set out potential reforms intended to increase trust in corporate governance. Changes could include new reporting requirements for directors and officers of listed companies and public interest entities. There are proposals that a new regulator be empowered to pursue enforcement action against directors and officers.


The UK Government has commissioned a series of independent reviews concerning auditing and corporate governance standards in the wake of high-profile corporate failures, including major construction and retail companies. The collapse of these companies has led to significant job losses and questions being raised about the adequacy of the UK’s corporate reporting requirements.


These reviews have called for a series of changes. Some changes concern directors and officers of listed companies and entities where there is perceived to be a public interest, principally due to their size. These proposed changes are motivated by a desire to move the UK closer to the Sarbanes-Oxley regime, which is seen as having improved reporting standards for listed US companies.


The UK Government has recently published a “Restoring trust in audit and corporate governance” consultation paper setting out a number of proposed reforms. The foreword to the paper advises that:


It is vital that investors, financial markets and all those who depend on the largest companies in the UK can continue to rely on the information they publish…I want to ensure investors can get high-quality, focused and reliable information on UK companies so they can invest here with even greater confidence.”


The reforms outlined would impact directors and officers of both companies listed on the London stock exchange, and “public interest entities”. At present, there are around 2,000 such entities, many of which are listed companies. The proposals would extend the definition of “public interest entities” so that it includes large private entities which satisfy certain financial thresholds.


Reporting requirements

The main proposals that may impact directors and officers of listed companies and “public interest entities” are the introduction of new reporting requirements. These include:


  • Reporting annually on the effectiveness of a company’s internal controls. This is expected to include details of the relevant benchmark used in measuring the effectiveness of the controls and any external assurance obtained by the company.
  • Stating that any proposed dividend is within known distributable reserves and that payment of it will not, in the directors and officers’ reasonable expectations, threaten the company’s solvency over the next two years. Directors and officers are expected to have regard to their obligations, including their duty under the UK Companies Act 2006 to promote the success of their company.
  • Publishing annually a Resilience Statement which assesses their company’s prospects, and addresses matters which may threaten its ability to meet its financial liabilities as they fall due. This is within a timescale of at least five years. It is expected that such statements may address matters such as business continuity in response to major disruptive events (for example pandemics), digital security risks, and potentially climate change risk.
  • Producing an Audit and Assurance Policy detailing what independent assurance their company intends to obtain over the next three years with regard to their Resilience Statement, other risk related disclosure and the effectiveness of their company’s internal controls framework. This is to assist investors in understanding what independent scrutiny has been applied to a company’s reporting.


Enforcement Action

It is proposed that the new Audit, Reporting and Governance Authority be given powers to investigate and to take enforcement action against directors or officers of public interest entities for breaches of corporate reporting duties.


Sanctions could include reprimands, fines and temporary prohibitions on acting as a director or officer of a public interest entity.


The new powers would not be at the expense of powers held by other UK regulators, such as the Insolvency Service’s ability to pursue disqualification proceedings against company directors and officers. The intention is that the new Audit, Reporting and Governance Authority would work closely with other UK regulators, including the Financial Conduct Authority and the Serious Fraud Office.


Malus and Clawback

It is suggested that malus and clawback provisions in directors and officers’ compensation packages should also be strengthened. It is proposed that such provisions should include the identification of minimum clawback conditions which would apply in all cases and have at least a two-year application period. Conditions could include clawback for serious misconduct, material misstatement of results, reputational damage and an unreasonable failure to protect the interests of employees and customers.


Impact on Directors and Officers, and Insurers

The reforms would extend the duties owed by directors and officers of listed companies and public interest entities to investors. Breaches of these duties would provide new avenues for a company’s investors to pursue claims against directors and officers. There would be the prospect of regulatory investigations by the Audit, Reporting and Governance Authority followed by enforcement action where it determines that this is appropriate.


The increased availability of litigation funding in the UK and changes to UK insolvency laws would make it easier for investors to pursue claims against directors and officers for breaches of corporate reporting duties. The Audit, Reporting and Governance Authority would want to demonstrate that it is prepared to exercise any new powers, given the criticisms levelled at its predecessor, the Financial Reporting Council.


The costs of defending claims and responding to regulatory investigations could be substantial. Where claims and investigations occur in an insolvency context, the scope and monetary limit of any D&O liability insurance cover will be of paramount importance to any directors and officers that are implicated.


The proposals may prompt risk managers and the boards of listed companies and public interest entities to consider purchasing increased levels of cover, and to review the scope of existing Side A cover. They may well also lead to Insurers applying the same level of scrutiny to public interest entities and to categorising them in the same bracket as listed companies when underwriting the risk.