Principle A of the FRC Code 2018 (the Code) states: “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”
Principle A is the first principle of the Code and sets out the role of your Board.
All of the later principles – all the way to letter R – can be linked back to this foundation principle.
Principle A is the basis on which you evaluate your board: how well is it performing this role?
Clues to the answer to your question can be found in the action words of that sentence which are the verbs promote, generate and contribute. Each verb is given equal weight.
Principle A doesn’t say that you must generate maximum value for shareholders and then, if you can, do so over the long-term and ideally along the way sponsor the local primary school’s tombola.
The word long-term is key. It’s an adjective which, obviously, means occurring over a long period of time.
Long-term qualifies the noun success. That means a company must be successful over a long period of time. Again, obviously.
A long period of time isn’t defined but my guess is that it’s about years, not quarters.
The FRC goes on to define success as value for shareholders and contributing to wider society.
But it doesn’t define value nor does it quantify contribution.
How much value is enough?
How much contribution to wider society is too little?
It’s interesting too that the FRC used the term wider society which implicitly acknowledges that business is part of society. Take-up of public COVID financing is proof of this, as if proof were needed.
The Guidance to the Code helps us understand the FRC’s intentions:
“A sound understanding at board level of how value is created over
time is key in steering strategies and business models towards
a sustainable future. This is not limited to value that is found in
the financial statements. An understanding of how intangible
sources of value are developed, managed and sustained – for
example a highly trained workforce, intellectual property or brand
recognition – is increasingly relevant to an understanding of the
company’s performance and the impact of its activity. These
are important considerations for boards when setting corporate
strategy. ” (Section 1.13)
Value according to the Code therefore isn’t just about “the bottom line” but a more nuanced approach to decision-making. An evaluation of the key decisions of your Board over the last financial year are key to evaluating compliance with this Principle.
The FRC’s use of the phrase ‘impact of its activity” gives us a clear steer on what it means by contribution to wider society. This is backed up by references to Section 171-177 the Companies Act 2006.
This means that your Board should, at the very least, know what impact its decisions have on society.
Does it? Do you?