Compliance and reporting

Reported compliance with the Code remains high, with the majority of companies either complying with all, or all but one, of its provisions.  However, the FRC comments that these high compliance levels do not reduce the need for companies to provide a meaningful explanation when they choose not to follow the Code.  In particular, it was noted that some companies continue to struggle to provide a rationale for any deviation from the Code.

Quality of engagement

The report notes that there are some encouraging signs that more engagement on a wider range of issues is taking place between large companies and their major shareholders.  However, there are concerns about the quality of engagement at mid-market companies and an emerging “engagement deficit”.  The FRC believes that the main priority must be to encourage and assist signatories to the Stewardship Code to deliver on the commitment they have given, and to monitor whether they are doing so.

Further efforts needed

Reporting by mid- and small-cap companies – the FRC believes that, in general, the reporting of these companies is less informative than that produced by larger companies.  While the FRC recognises that there are greater resources available to larger companies, the FRC does not believe that the size of a company should be a determining factor in the level of transparency investors can expect.

Succession planning – boards need to do more to anticipate the need for changes rather than being purely reactive.  For these reasons, the FRC will undertake a project in 2014 with the aim of identifying and spreading good practice in succession planning and, more generally, how the nomination committee can play its role effectively.

Board evaluation – some companies have raised concerns about the variable quality of service provided by external facilitators.  The FRC has published data from Practical Law which shows that 51 different facilitators were appointed by FTSE 350 companies in the period under review.  On the same topic, the FRC is encouraging companies to disclose the main actions that were agreed following the board effectiveness review and, where relevant, how those actions have been or will be implemented.

Election of directors – the FRC has reviewed a sample of 50 AGM notice papers to assess the extent to which companies were setting out the reasons why the company believed that the directors should be re-elected.  The FRC considers that the majority of companies could do more to explain to investors in the AGM papers how individual directors contribute to the effectiveness of the board as a whole.

Possible changes to the Code in 2014

Responding to the recommendations from the Competition Commission – the FRC is considering the recommendations in relation to audit committee reporting and to implement the advisory shareholder vote on the audit committee report.  In addition, the FRC will review whether to retain the “comply or explain” tendering provision in the Code in light of the Competition Commission’s decision on mandatory tendering.

Website publication of the full corporate governance statement – the FRC is considering whether the Code should be amended to allow companies to place the full corporate governance statement on the website, with an edited version containing the disclosures most relevant to investors in the annual report.

Remuneration – the section of the Code dealing with remuneration will be updated in light of the new legislative requirements on reporting and voting on directors’ remuneration.

The full report is available on the FRC website.