Annual review of corporate governance reporting

The Financial Reporting Council (FRC) has published its annual review of corporate governance reporting against its UK Corporate Governance Code (the Code). The Code, published in its current form in 2018, provides businesses with key corporate governance recommendations.

A 2016 iteration of the Code was revised to better emphasise the benefits of good corporate governance. Reducing the number of provisions by a third, including removal of the concept of ’supporting principles‘, the Code now consists of 18 Principles and 41 Provisions across 5 sectors:

• Leadership and purpose;
• Division of responsibilities;
• Composition, succession and evaluation;
• Audit, risk and internal control; and
• Remuneration.

Fundamental to the Code are its reporting expectations. The FRC expects applicable companies to include a statement in their annual financial reports as to how they have been applying the Code. However, in its review of some 100 sample companies (across both the FTSE 100 and FTSE 250) the FRC found that too many continue to treat the Code ’as a box-ticking exercise‘.

The review criticises the reporting of many companies as not ’coherent or cohesive’. For example, a reoccurring issue was companies highlighting the importance of diversity and, in particular, having a diverse board, yet providing very little by way of explanation or targets to improve diversity.

The review further recommended:

• Companies should provide clear and meaningful explanations of how they achieve good governance standards in line with the flexibility offered by the Code;
• Clearly showing the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success;
• Better assessment and monitoring of culture, including consideration of methods and metrics used; and
• Demonstrating commitment to diversity and inclusion through actions, such as improved succession planning and recruitment from diverse talent pools.

The review emphasises that ’quality corporate reporting maintains the confidence of company stakeholders‘; ’confidence‘, it states, that will allow the company to become more accountable and trustworthy. Going forward, it is therefore expected that continued poor reporting is unlikely to be tolerated by the FRC and could lead to greater scrutiny.

Rather than claiming full compliance with little evidence, the FRC hopes to encourage companies to set out their application of the code alongside evidence and an explanation as to why this approach is right for the company.

Access the Review of Corporate Governance Reporting