Essential Corporate News: Week ending November 26, 2021

FRC: Annual Review of Corporate Governance reporting

On November 24, 2021 the Financial Reporting Council (FRC) published its Annual Review of Corporate Governance Reporting. The review highlights areas of high-quality reporting, but notes that there is still room for further improvement in areas such as substantive disclosures on board appointments, succession planning, diversity and reporting on the effectiveness of internal control and risk management systems. In addition, greater clarity as to how a company is applying the principles in the 2018 UK Corporate Governance Code (Code) is needed,  as well as clearer explanations where there are departures from the Code so that shareholders and stakeholders have greater confidence of the quality of governance.  

The review sets out the FRC’s expectations across the five areas of the Code. In each the FRC sets out its general conclusion, areas where reporting could be improved and examples of good practice along with expectations.

FRC’s reporting expectations

To support improved reporting the FRC has reiterated its expectations of 2020 and, where relevant, introduced new expectations to support findings of this year’s assessments. As a result it want to see the following:

• Greater attention to the alignment between reported good governance and company practices and policies, strategy and business models.
• Increased focus on assessing and monitoring culture by using different methods and metrics.
• Better reporting of succession planning, and how this links to assuring the make-up of the board and delivering diverse challenge.
• Improved reporting on outcomes and actions, rather than declarations or statements of intent without detail.
• Increased focus on assessing and ensuring the effectiveness of the risk management and internal control systems.
• Better explanation of how executive remuneration is aligned to a company’s purpose, values and strategy.

The FRC also wants companies to be clear about:

• Departures from Provisions and provide a detailed explanation.
• Engagement with shareholders and the workforce in relation to remuneration, and the impact on remuneration policy and outcomes.
• The impact of engagement with stakeholders, including any areas where the company failed to meet targets.
• The impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
• Explaining diversity policies with objectives and targets and demonstrating their connection to company strategy.
• The relationship and level of oversight between the board and committees.

Non-compliance with Code

The review notes a higher degree of non-compliance with the Code than in the previous year.  Provisions with the highest levels of non-compliance were Provision 38 (Alignment of pension contributions),  Provision 9 (Chair independent on appointment),  Provision 19 (Chair remaining in post beyond nine years),  Provision 36 (Post-employment shareholding requirement),Provision 32 (Remuneration committee composition) and Provision 24 (Audit committee composition). The review states that companies should improve their reporting on non-compliance by being more transparent and providing informative explanations and are referred to the FRC’s February 2021 report on Improving the quality of “comply or explain” reporting for guidance.

Conclusions in relation to areas for improvement

While the FRC has noted improved reporting across stakeholder engagement, there is still room for improvement in terms of impact and outcomes in relation to suppliers, communities and modern slavery reporting.

The FRC is pleased to see that environment and climate issues are being integrated into board decisions. As new regulations come into effect, the FRC expects companies to improve governance of these matters and explain how they impact strategy and financial planning.

The FRC welcomes more reporting of non-compliance against specific Provisions of the Code and would like to see a similar improvement over the next year in explanations, with more information about the reason for departures along with any support offered by shareholders.

Nominations committees appear to receive less focus within the annual report than audit or remuneration committees. The FRC would like to draw attention to their importance as their work is central to ensuring that the board is adequately resources and effective. It comments that unfortunately, the reporting by these committees on board effectiveness, succession planning and diversity is often process-driven and ambiguous in terms of targets and achievements, with little detail of long-term plans. The FRC will be looking for improved quality of reporting by nominations committees. 

With the recent announcement of investor signatories to the UK Stewardship Code, in next year’s annual reports the FRC wants to see improvements in the quality of disclosures from companies about their engagement with investors, especially following votes against resolutions and issues material to the sustainable success of the company.

(FRC, Annual Review of Corporate Governance reporting, 24.11.2021)