FRC publishes corporate governance and stewardship monitoring report

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15 Jan, 2015

The Financial Reporting Council (FRC) had today published a report providing an assessment of corporate governance and stewardship in the UK (“the report”). The report highlights the quality of engagement with, and reporting against, the UK Corporate Governance and Stewardship Codes, provides findings on the quality of engagement between companies and shareholders and provides an indication as to where the FRC would like to see changes in governance behaviours and reporting. Compliance with the UK Corporate Governance Code continues to be “very high among companies of all sizes”; however “examples still exist of generic and boiler-plate disclosures”. Concerns are also expressed regarding the standard of reporting by signatories to the Stakeholder Code and the level of engagement between companies and investors.

Key findings from the report, which is based upon a number of reports and surveys, are as follows:

Governance and reporting

  • 94 per-cent of FTSE 350 companies comply with all, or all but one or two, of the UK Corporate Governance Code’s 54 provisions
  • 61 per-cent of FTSE 350 companies fully comply with all 54 provisions
  • Progress has been made in the area of diversity.  The target of 25% female directorships by 2015 set by Lord Davies “is well within reach” with 22.8% of FTSE 100 directorships now held by women.  Improvements have also been seen in the level of female executive directors in FTSE 100 companies, although there has been a “marginal decrease” in the FTSE 250.  The level of female non-executive directors across the FTSE 100, FTSE 250 and small cap companies.    
  • The 2012 edition of the UK Corporate Governance Code brought in an expectation that companies should set out their policies on boardroom diversity and report on the progress against any measureable objectives they had set themselves.  The report highlights that 98 per-cent of FTSE 100 companies “make some reference to diversity” with 85 per-cent having a “clear policy”.  The figures were 56% for FTSE 250 companies and is an “area where more improvement is required”.
  • There has been an improvement in audit committee reporting with approximately two-thirds of audit committees now providing a “good or detailed discussion of significant accounting issues”.
  • Disclosure in relation to appointing the auditor, safeguarding objectivity and independence relative to the use of non-audit services has “generally been of a good standard”, although the report identifies the need for improved disclosure in the expected timing of an audit tender.
  • For a sample of FTSE 350 annual reports, the FRC found that the standard of explanations for departures from the UK Corporate Governance Code provisions “continues to be variable”.
  • Improvements are still required in the board’s assessment that the company’s annual report and accounts taken as a whole is fair, balanced and understandable.  There is a variation in the nature of the board’s assessment in FTSE 350 annual reports – 10 per-cent of FTSE 350 companies currently provide no explanation at all. 

Stewardship and engagement

  • The report highlights “encouraging signs” that “more engagement on a wider range of issues is taking place between large companies and their major shareholders” but this is not the case across the listed sector or across all signatories.
  • Companies and investors are calling for “more proactive and better quality engagement”, especially in the area of the binding vote on remuneration.
  • The FRC are concerned about the quality of reporting against the seven principles of the Stewardship Code (link to FRC website).  For its annual sample of signatories’ statements against the Stewardship Code in 2014, the FRC found that “not all are reporting against all seven principles of the Code”.  For those that did report against all of the principles, the FRC comments that “the depth of statements continues to vary considerably”.  The report highlights that “the FRC will look to signatories to make better efforts to report sufficiently across the seven principles and the instances where explanations are required”.

Based on these findings and others highlighted in the report, the FRC considers the following to be the key issues for investors and companies in 2015:

The importance of good corporate culture and embedding sound governance behaviours throughout companies;

Board composition and ensuring suitable succession planning is in place;

Effective board evaluation and reporting;

Active engagement between boards and investors and improved reporting in this area;

Early consideration of the new viability statement;

Maintaining effective risk management and internal controls;

Focussing on the quality of explanations under both Codes; and committing to clear and concise reporting.

The FRC will also continue to focus on the issue of company culture and behaviour and in 2015 and, among other things, will:

  • assess how effective boards are at establishing company culture and practices and embedding good corporate behaviour, and will consider whether there is a need for promoting best practice.
  • re-emphasise the value of ‘comply or explain’ in achieving good governance
  • begin an project to study how best it can promote a culture of stewardship and its benefits; and how it can increase scrutiny of adherence to the Stewardship Code in order to improve the quality of practice and reporting.
  • focus on the role of proxy advisors

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