The report indicates that compliance with the UK Corporate Governance Code “remains high” and that the quality of explanations for non-compliance with the UK Corporate Governance Code’s provisions has improved – the FRC sees this as a “more thoughtful approach to governance”. However 2015 provided a “mixed picture of progress” regarding the Stewardship Code with reporting against the principles of the Stewardship Code of “inconsistent quality”.
Key findings from the report, which is based upon a number of reports and surveys, are as follows:
Governance, reporting and audit
- 90 per cent of FTSE 350 companies comply with all, or all but one or two, of the UK Corporate Governance Code’s 54 provisions. This is a slight fall from 94% in the prior year.
- Code provision B.1.2 which states that at least half the board (excluding the chairman) should be independent, remains the area of most non-compliance amongst FTSE 350 companies.
- There has been a “notable rise” in the quality of explanations for non-compliance with provisions of the UK Corporate Governance Code. It was highlighted that “explanations were better where companies depart from the Code due to force of circumstances – such as directors leaving the board at short notice”.
- Disclosures on external audit appointments improved including “better clarity on company policy and more detailed insight into the processes by which auditor effectiveness and independence are assessed”. However “fewer companies disclosed the expected timing of their next audit tender” - the FRC expects this to increase next year.
- The 2012 edition of the UK Corporate Governance Code introduced requirements for audit committees to provide more detail on the work they do. Overall disclosures on the work in this area have improved – 72 per cent of FTSE 350 companies now give more detailed descriptions of the work they do versus 65 per cent in 2014. However, there is still room for companies to improve their audit committee reporting.
- 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 there has been an increase in the number of FTSE 100 companies that provide details on their gender diversity policy. Nevertheless, some still made no reference at all in both the FTSE 100 and FTSE 250. Additionally, the report indicates that “there remain a disappointing number of companies (including 24 in the FTSE 100) who despite recognition of a broader concept of diversity in the Code, still make no reference to this subject”.
- Only a “small number of companies” have decided to early adopt the requirements of the 2014 version of the UK Corporate Governance Code. With respect to the revised Principle D.1, there has been an increase from 37 per cent to 51 per cent of FTSE 100 companies having longer share retention periods with regards to remuneration. The FRC has indicated that it will continue to see how market practice develops in relation to the 2014 Code requirements.
Stewardship and engagement
- The FRC highlights that it has “been pleased to see improvements in the quality and quantity of investor monitoring and engagement”. However it also indicates that more is required “to promote best practice”.
- The quality of signatory statements has seen to “vary considerably”. The FRC wants to improve this and in December 2015 announced that it is to introduce a public tiering of signatories to the Stewardship Code in order to improve reporting against the Code and to assist investors.
- Investor feedback in 2015 was positive on engagement between companies and investors with many indicating that companies were being more responsive.
- Concerns were expressed in 2014 about the role of proxy advisors. The FRC will continue to promote best practice in this area.
- 2015 saw an increase in voting activities at companies meetings with 73 per cent voter turnout in the UK.
The report indicates that in 2016 the FRC will “continue to promote corporate governance and corporate cultures that support the long-term success of companies”. It will also “encourage effective investor stewardship and engagement between companies and investors”. Specifically the FRC will:
Analyse the responses to the Succession Planning Discussion Document and consider whether any further action is necessary.
Continue to monitor adoption of 2014 UK Corporate Governance Code provisions.
Complete [its] market-led review about how boards can most effectively establish company culture and practices that embed good corporate behaviour.
Introduce the limited changes to the UK Corporate Governance Code linked to the implementation of the EU Audit Regulation and Directive (ARD) in 2016, but otherwise avoid revising the UK Corporate Governance Code over the three year strategy period.
Promote effective investor stewardship by evaluating Stewardship Code signatories’ statements and making public our assessment, promoting stewardship and engagement activities and initiating implementation of the Shareholder Rights Directive.
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