Corporate Governance

Companies ‘adapt well’ to new corporate governance code

UK companies have “adapted well” to the recent overhaul of corporate reporting requirements, according to EY’s latest review of 2019-20 FTSE350 annual reports.

The ‘Annual Reporting in 2019-20: From Intent to Action’ report examined 100 FTSE350 companies’ annual reports.

It found that 61% had complied with all provisions of the FRC’s new 2018 UK Corporate Governance Code, while 80% had complied with all but one provision.

The 2019-20 annual reports were the first to be affected by the overhaul of corporate reporting requirements. 

Mala Shah-Coulon, EY’s head of corporate governance, said: “The new code and related regulations place significant new requirements on companies, that have implications not just for reporting but the underlying governance processes too. 

“Covid-19 has been a litmus test, forcing companies into action and bringing purpose, culture and stakeholder engagement – key aspects of the 2018 Code – to the fore. Our review found that FTSE350 companies have made a good start at implementing the changes, but more work is needed to turn intent into action.”

The new Section 172 (1) statement requires companies to describe how directors have had regard for stakeholders when making principal decisions. 

EY’s review found that 45% of the companies sampled did not provide these examples or case studies to illustrate how stakeholder considerations had affected the decisions taken, however.

It also found that many of the FTSE350 companies reviewed had “weak links” between their stated purpose and the strategic objectives outlined in their annual report. 

According to EY, while 86% of companies had a purpose statement, “very few articulate the link to their business strategy”.

Code Provisions with the highest rate of non-compliance by FTSE350 companies in 2019-20 related to independence and employee engagement, however. 

EY found that 9% of companies were not compliant with requirements to ensure that executive pension contribution rates were aligned to employee contribution rates.

In addition, 8% were non-compliant with chair tenure requirements, while 6% were non-compliant with board, chair or remuneration committee independence requirements.

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