FRC warns against ‘neglect’ of Corporate Governance Code

Out-Law News | 25 Nov 2021 | 4:10 pm | 2 min. read

The UK’s Financial Reporting Council (FRC) has warned that a “number of areas” of the corporate governance code are being “neglected” by companies.

In its annual review (54-page/ 6.23MB PDF), the industry watchdog said that too many organisations still failed to make substantive disclosures on key areas, including board appointments, succession planning and diversity.

The report called for greater clarity from companies on how they apply the code, “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 FCA did note general improvement in disclosures concerning environmental and social issues over the last year – particularly in relation to how they were considered at board-level – but said subscription to diversity and inclusion policies often lacked cohesion.

Alignment between a company’s remuneration arrangements, its values and wider strategy was often unclear, the report said, as well as the interaction between major decisions, stakeholder engagement and specific long-term success factors.

Sir Jon Thompson, CEO of the FRC, said: “The best governance reporting offers transparency that goes beyond broad brush declarations and sets out clearly and concisely how the Principles of the Code were applied and the nature of compliance with the Provisions of the Code.”

“As we emerge from the pandemic, companies should use this report’s examples of good corporate governance policies and reporting to deliver long term benefits for the company for all its stakeholders, the economy and society as a whole.”

Reacting to the report, corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, said it contained “a statement of intent” from the regulator.

“The FRC makes clear that, as it prepares to transition to the new Audit, Reporting and Governance Authority (ARGA), it will continue to look for reporting on action and impact.

“Generalised statements of intent are not sufficient. Instead, reporting should focus on outcomes and, in line with previous messaging from the FRC, high quality explanation for non-compliance is preferred to compliance as an end in itself,” he added.

Proverbs-Garbett said reporting on how stakeholder engagement has impact on major decisions “is deemed to be a critical element for investors, evidencing the joined-up nature of a company’s asset base and strategy and the potential for the board and senior management to deliver on the strategic aims and goals set out in the company’s report. At the very least, authors of a report should aim to be internally consistent, making clear the relationship between positions taken in it,” he said.

“Interestingly, the FRC noted the relative infrequency of reporting on underperformance or the failure to meet targets. While one can understand a company’s reluctance to air its dirty laundry in public, reporting transparently and truthfully demonstrates an authenticity that investors value,” he added.

“It is also an opportunity to demonstrate board decision-making at work when it counts most, particularly for section 172 purposes,” he said.

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