FRC publishes its latest review of corporate governance reporting

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04 Nov, 2022

The Financial Reporting Council (FRC) has published its latest ‘Review of Corporate Governance Reporting’.

A sample of 100 companies drawn from the whole premium listed market was reviewed. The comprehensive report presents the findings from the review and sets out the FRC’s expectations for the future application of the UK Corporate Governance Code (“the Code) and reporting.

The report highlights areas of high-quality reporting, but also draws attention to improvement needed in areas such as disclosures on workforce and wider stakeholder engagement, diversity and oversight of the effectiveness of the risk management and internal control systems. In particular, the FRC has looked closely for disclosure of actions and outcomes resulting from governance policies, procedures and activities noting that better disclosures include specific examples and case studies.

As last year, the FRC notes a general improvement in reporting. The review highlights the continuing need for high quality governance which is linked to effective decision-making by Boards and management and for greater clarity as to how a company is applying the Code’s principles and clearer explanations where there are departures from the Code provisions so that shareholders and stakeholders have greater confidence in the quality of governance.

To improve disclosures, the FRC reporting expectations include the following:

  • Moving away from declaratory statements and providing specific disclosures.
  • Providing clear and meaningful explanations when departing from the Code.
  • Demonstrating how the company’s culture, is aligned to its purpose, values and strategy.
  • Reporting on engagement with shareholders and stakeholders, and how their views have been considered.
  • Making clear linkages in the annual report to policies or disclosures that relate to stakeholder matters.
  • Reporting on diversity, including at a senior leadership level beyond the recommended external targets including objectives and targets.
  • Explaining how the board or a committee has reviewed the effectiveness of the risk management and internal control systems. Companies are expected to explain how they have monitored their risk management and internal control systems throughout the year and any changes made to ensure their continuous efficacy.  When reporting the outcome of their review companies should demonstrate the current state of the risk management and internal control systems confirming the effectiveness of these systems or, where weaknesses or inefficiencies have been found, describing these in the annual report.  Companies should also disclose what evidence led them to their conclusion about the effectiveness by reporting on the actions they have taken to monitor and review those systems during the year.
  • Reporting on how the executive remuneration arrangements align with the company’s purpose, values and strategy.

In addition, the FRC draws attention to ensuring clarity in the disclosures of:

  • not only the outcomes from culture assessment and monitoring activities, but also the impact of any remedy initiatives to assess their effectiveness in the following reporting year;
  • the extent to which shareholder engagement activity enabled shareholders to ask questions and present their views and concerns;
  • how workforce views obtained from engagement activities are connected to actions carried out by the board;
  • management of modern slavery risk including how the company has evaluated the impact of modern slavery on the business and who is responsible for driving strategy on modern slavery;
  • the methodology used to calculate energy and carbon data, as well as a discussion of work that is underway to disclose in future, or to enhance current disclosure, and clarity about which of the Scope 3 categories will be included;
  • how diversity objectives and initiatives link to company strategy; and
  • procedures to identify and manage emerging risks; and following an assessment, an explanation of the emerging risks identified and actions to mitigate them.

Members of the audit committee, should ensure that their companies are well prepared in advance of their year ends to address the recommendations and to consider matters for ongoing improvement.

A press release and the full report are available on the FRC website.

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