The report includes commentary on the quality of reporting against the 2016 UK Corporate Governance Code but it is the comments on ‘early adoption’ of the 2018 Code where the FRC is setting out its clear expectations for companies about to report on the new Code.
Issuing the report, the FRC’s Chief Executive, Sir Jon Thompson said:
While there are examples of high-quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change. Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.
The FRC makes clear that they wish to see a much greater focus on the practical activities and outcomes of implementing the Principles of the 2018 Code. It is felt that many governance reports lack information on the outcomes of governance policies and practices, including any areas for future development.
Specific expectations set out in the report:
- Purpose – the FRC has observed that too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit. This approach is not acceptable for the 2018 Code. The FRC recommends that companies consider the guidance provided in the Financial Reporting Lab’s report Business model reporting; Risk and viability reporting – Where are we now? which considered company purpose and provided some good practice examples of purpose statements.
- Culture – there is an expectation that companies have progressed their work on assessing and monitoring culture during 2019 and that more detail will be provided on the value and effectiveness of chosen practices, the range of metrics used and the role of internal audit in assessing and/or monitoring of culture.
- Workforce engagement – 2020 annual reports should make it clear how the workforce engagement mechanisms used have achieved the objective of Provision 5 of the 2018 Code and include details or real examples of what a company has done to consider and, if appropriate, take forward matters raised by the workforce.
- Section 172 reporting – disclosures must include the concerns raised by stakeholders, how companies have understood the issues, and how they have thought carefully about how these impact on the long-term success of the company.
- Chair tenure – where a chair has been on the board for nine years or more, the FRC expects these companies to set out their rationale for this situation and their proposals for the future composition of their boards.
- Succession planning – there should be more focus on providing information on how the company plans for the various types of succession that exist rather than on the appointment process.
- Director re-election – AGM notices should make clear the reasons for an individual’s re-election, specifically linking their contributions to company strategy, risks or similar key issues referenced in the annual report.
- Diversity and inclusion – there should be more detailed commentary on all aspects of diversity in future disclosures rather than just gender. In addition, companies need to report against their objectives as set out in the company’s policy on diversity and inclusion.
- Remuneration – companies are encouraged to use more non-financial metrics to measure their annual bonus and LTIP awards. Future reporting will also need to provide insight into both how workforce pay influences pay policy, and how any new pay policies are communicated to the workforce. Malus and clawback provisions are vital for remuneration committees in terms of exercising their oversight duties and full details of these arrangements should be provided. Finally on remuneration, there is an expectation that companies should explain how will they align executive pension contribution rates with their workforce.
- Viability reporting – companies should take time to consider the Financial Reporting Lab report on Risk and Viability Reporting to improve future disclosures. The FRC also signals that it intends to consult and issue updated guidance on Guidance on Risk Management, Internal Controls and Related Financial and Business Reporting, taking into account the Kingman and Brydon reviews.
- Explanations – these should be sufficiently clear to be convincing and understandable to all shareholders without the need to contact the company.
- Relations with shareholders – all types of vote (including abstentions) should be taken into account when considering whether there has been any significant minority dissent to a resolution.
A press release and the full report is available on the FRC website.