Essential Corporate News – Week ending November 4, 2022

FRC: Review of Corporate Governance Reporting 2022

On November 3, 2022 the Financial Reporting Council (FRC) published its annual review (Review) of how companies have reported on their governance in line with the Principles and Provisions of the UK Corporate Governance Code (Code). The FRC assessed 100 FTSE 350 and Small Cap companies.

Key findings

Key findings in the Review include the following:

• More companies are now offering greater transparency when reporting departures from the Code, including those instances where the chair’s tenure is extended beyond nine years. The FRC reminds companies that where they have departed from a Provision, a meaningful explanation should be provided. Some companies fail to provide an explanation, whereas many others give boilerplate or vague ones.
• The FRC looked closely for the disclosure of actions and outcomes resulting from governance policies, procedures and activities. The better disclosures included specific examples and case studies, but these were generally in the minority. 
• Workforce engagement issues appear to continue to be high on companies’ agendas, although disclosures on outcomes of the engagement are almost exclusively in relation to flexible working matters. Where companies engaged their workers in reviewing corporate culture, purpose, values or desired behaviours, most reported on the positive impact of such an approach.
• Reporting on wider stakeholder engagement is generally of a good standard. However, there is often insufficient narrative on the outcomes from the engagement, including feedback received, or commentary on whether the board acted on any of the issues raised and how decisions align with company strategy, or culture, purpose and values.
• The FRC found minimal disclosure of specific board members’ engagement with major shareholders. Given significant votes against resolutions are common, votes against remuneration matters remain high, and there is renewed interest in environmental, and social matters, the FRC expected to see reporting on engagement by the chair and committee chairs increase in both quantity and quality. However, this is not the case and where engagement is reported, it offers little insight. 
• The majority of companies have met or are on track to meet external diversity targets but this progress has yet to translate into senior roles, for example, CEO and CFO roles where progress appears slow. Due to the lack of transparency in relation to diversity policies and targets, it is not clear how many companies strive to go beyond external targets.
• Over half of the companies provided a statement to confirm that their risk management and internal control systems are effective or that no weaknesses or inefficiencies have been identified. However, many of those companies do not explain how they assessed the effectiveness of these systems to justify the results of their assessment.

Compliance with the Code

The Review sets out the FRC’s reporting expectations to improve disclosures and it then looks at compliance with the Code’s Principles and Provisions and explanations for non-compliance in more detail. Compared to 2020 figures, there has been a particular increase in non-compliance with Provision 38 (pension alignment), and also with Provisions 24 and 32, (composition of audit and remuneration committees, while there has been a significant drop in the rate of non-compliance with Provision 9 (the chair not being independent on the appointment, or the roles of chair and CEO are combined).

The Review then considers reporting in relation to different aspects of the Code in some detail and includes examples of good practice disclosures.

The FRC’s conclusion

Overall, year on year, improvements in corporate governance reporting are being made, despite a continuously challenging economic landscape, but there are still areas which require more attention. The FRC notes that no company reports exceptionally in all areas but by sharing good practice examples it wants to encourage companies to learn from each other and ‘race to the top’ on quality reporting. As a result it is encouraging companies to: make greater disclosure on actions, outcomes and impact; provide balanced feedback, specific examples and case studies; include insightful explanations for non-compliance with the Code; align board decisions with strategy, as well as culture, purpose and values. 

Next steps in relation to the Code

In 2023,  the FRC will consult on a revision of the Code, largely due to its transition to ARGA and the changes to governance and related reporting recommended in the government’s response to its consultation “Restoring Trust in Audit and Corporate Governance”. There will not be a wholesale revision of the Code, but the consultation will focus on those areas identified in the FRC’s Position Paper, published in July 2022. The FRC intends to avoid and minimise duplication with other reporting requirements so that the Code continues to provide clear direction and reduces reporting burdens.

(FRC, Review of Corporate Governance Reporting 2022, 03.11.2022)