Accounting Standards

New Corporate Governance Code reporting a ‘mixed picture’, says FRC

Although some companies have embraced the opportunities the revised UK Corporate Governance Code offers, the FRC has found in its Review of Corporate Governance Reporting that this was “not consistent across the board”.
The review, made up of a random sample of 100 companies, which included both FTSE 100 and 250 companies, as well as Small Cap companies, found that some companies “continue to treat the code as a box-ticking exercise”, according to the FRC.

Where this happens, it said reporting is formulaic and companies do not seize the opportunity to “meaningfully explain why they do not comply with its provisions”.

The code was revised to emphasise the wider benefits of good governance for the economy and society. It calls on companies to establish a purpose which is aligned with its culture and strategy, and forge strong relationships with key stakeholders.

The FRC’s review also found that corporate governance reporting “failed to live up to stakeholder expectations”. For example, it said many companies stated the importance of diversity at board level and in the succession pipeline but offered little explanation to set out what they are doing to deliver that.

The FRC said it is concerned that some companies “continue to rely on the reporting process rather than substance”. The review highlights the need to demonstrate consideration of feedback to the board and outcomes, such as the influence on decision-making. In many cases, it was not clear how issues were raised to the board level, and how that then affected decision-making.

The review has allowed the FRC to set out expectations for improvement in the following areas:

Companies should provide clear and meaningful explanations of how they achieve good governance standards in line with the flexibility offered by the Code
Clearly showing the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success
Better assessment and monitoring of culture, including consideration of methods and metrics used
Demonstrating commitment to diversity and inclusion through actions, such as improved succession planning and recruitment from diverse talent pools.

Sir Jon Thompson, CEO of the FRC, said: “Today’s review highlights many examples of excellent reporting but it’s clear that some companies are continuing to take a formulaic approach to corporate governance driven by compliance, rather than focusing on outcomes, supported by high quality and transparent evidence.

“This review sets out clear expectations to address where company reporting falls short, so that it can better meet the interests of not only a company’s shareholders but its wider stakeholders as well.”

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