FRC Reports on Development in Corporate Governance

The Financial Reporting Council (FRC) has published its annual report on Developments in Corporate Governance and Stewardship amid failing public trust in business. Investment in UK businesses, and in turn, the economic wellbeing of the country, relies on high standards of governance, but the benefits of such investment must be felt throughout society as a whole in order for businesses to have continued public trust.

The report aims to:

  • ‘give an assessment of corporate governance and stewardship in the UK;
  • ‘report on the quality of compliance with, and reporting against, the two Codes;
  • ‘report on the quality of engagement between companies and shareholders; and
  • ‘to indicate to the market where the FRC would like to see changes in corporate governance behaviour or reporting.’

The FRC states that it has taken steps to improve corporate governance through encouraging greater boardroom diversity, improved risk reporting and disclosure of long-term viability statements, and highlighted the role of boards in implementing good governance and corporate culture. The FRC believes more focussed reporting is required by boards, specifically as to how they discharge their responsibilities.

In the report, the FRC highlights a general lack of investor support for remuneration resolutions and a concern for the lack of transparency regarding executive performance and pay. The report also addresses the need for better succession planning and more understanding of the link between strategy and business value.

Other findings in the FRC report include:

  • The number of FTSE 350 companies that make up at least half their board with non-executive directors as per the requirement of the Code has fallen from 42 in 2015 to 26 in 2016.
  • The number of FTSE 350 companies reporting full compliance with the code is up from 57% in 2015 to 62% in 2016, with 90% of companies reporting full compliance with the exception of one or two requirements.
  • With regards to Nomination Committees, the report notes that committees must actively align board composition with strategy so that boards incorporate the diverse skills needed for long-term success.
  • The FRC reports that there were too many instances of poor explanation with regards to non-compliance and highlights the need for companies to explain fully how alternative approaches are consistent with the Code.
  • Regarding the Stewardship Code, the FRC noted a substantial improvement in the quality of signatory statements after its assessment in 2016. The assessment categorised signatories into tiers based on the quality of their statements against the Code. The assessment led to an increase in the number of owners and asset managers in the top tier from 20 to 80, which shows an improvement in understanding of the nature of signatory activity.

The report has helped to raise the discussion of the role of boards in ‘shaping, embedding and discussing company culture,’ since a healthy culture is a valuable asset and vital for long-term success. It has also demonstrated the need for strong leadership, particularly from chief executives, and the need for transparency and accountability, which is necessary for respecting a wide-range of stakeholder interests.

Paul George, Executive Director of Corporate Governance and Reporting, said: “The Code is 25 years old. It has served the UK well by attracting capital and through evolving with the market and the needs of investors. The need to maintain the UK’s position as a centre of excellence for business and a destination of choice for global investors has never been more important. The FRC stands ready to revise the UK Corporate Governance Code and associated guidance in 2017.”

To read the full report click here.

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