January 9, 2020
Companies need to improve their governance practices and reporting if they are to demonstrate their positive impact on the economy and wider society, according to a new report from the Financial Reporting Council (FRC).
While changes to the 2018 UK Corporate Governance Code raised the bar considerably and have led to some high-quality reporting, greater focus is needed on longer term sustainability including stakeholder engagement, diversity and the importance of corporate culture. These changes are expected to take time to bed in.
The UK Corporate Governance Code was updated to help build trust in business by forging strong relationships with key stakeholders. It called for companies to focus on long-term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity.
The FRC reviewed reporting against the 2016 UK Corporate Governance Code and assessed FTSE 100 ‘early adopters’ of the revised 2018 Code. The 2018 Code came into force in 2019 and all Premium listed companies will report against it this year. The FRC’s analysis found:
· Some good examples of reporting by companies who are increasingly using incentives relating to non-financial matters and are grounded in long-term strategy.
· Many companies are grappling with defining purpose and what an effective culture means with too many substituting slogans or marketing lines for a clear purpose.
· There is insufficient consideration of the importance of culture and strategy, or the views of stakeholders. Following the FRC’s 2016 report on culture, companies should be commenting on culture and now explain how they are monitoring and assessing it.
· Limited reporting on diversity. Those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long-term value of diversity.
· The use of engagement surveys was portrayed by many as an effective tool to achieve insight on employee engagement and culture. While these can help, they should not be used in isolation. Companies must be able to demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board and how this affects company decisions.
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.
“Where companies depart from the Provisions of the Code they need to provide compelling explanations for why non-compliance is the right approach for their particular company.”
Good quality explanations which are specific to individual companies, improve transparency and provide important insight into a company and the way it is run, often explaining risks and any mitigating actions. Explanations from a small number of companies that continually fail to meet the Code’s Provision for board composition in terms of director independence were particularly poor.
In the future, companies also need to ensure they apply the Code’s principles in a manner shareholders’ can more easily evaluate with a much greater focus on activities and outcomes reporting. This should set out the effectiveness of the board in decision-making, and how this has led to sustainable benefits for shareholders, employees and wider stakeholders.