UK companies need to do more to improve public trust says FRC

The Financial Reporting Council (FRC) has said it is ready to make further changes to the UK’s corporate governance code to reflect concerns about the role of companies within society and to improve public trust in its annual report, Developments in Corporate Governance and Stewardship 2016.

The report, published as the FRC marks 25 years since the Cadbury Code was produced in 1992, highlighted how the corporate governance landscape is developing within the UK. Some of the FRC’s work around corporate culture preempted the current political interest. However, the regulator said it will respond positively to the government’s consultation on corporate governance and work with MPs on the Business, Energy and Industrial Strategy select committee which is conducting its own the corporate governance inquiry.

The FRC suggested that its guidance on strategic reporting could be changed and that reporting by companies against Section 172 of the Companies Act covering the responsibilities of directors could be improved. The FRC has proposed that it could be given additional powers to enforce Section 172 of the Act. As part of its own development, the FRC said it has established a stakeholder panel comprising a wide range of interested parties in order to bring a broader range of perspectives into its decision-making and work.

Paul George: FRC’s Executive Director, Corporate Governance & Reporting

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. We must continue to ensure that business behaviour, underpinned by strong and respected corporate governance principles, develops over the next quarter of a century and beyond. 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.”

The FRC said that the latest Grant Thornton survey found that compliance with the UK corporate governance code remains high, with 90 per cent of FTSE 350 companies reporting compliance with all, or all but one or two, of its 54 provisions. Full compliance has risen from 57 to 62% this year. The provision for at least half the board, excluding the chairman, to be independent non-executive directors is the provision most frequently not complied with (although non-compliance is down from 42 FTSE 350 companies in 2015 to 26) which has a subsequent impact on compliance with provisions relating to committee memberships.

Data compiled by Manifest on behalf of the FRC shows that in respect of board and committee composition, compliance levels among companies on the FTSE Small Cap and Fledgling indices remain on par with those of larger companies.

The analysis of the 2016 AGM season included in the FRC report showed generally reduced support for remuneration resolutions and concern about a lack of transparency in the link between executive pay and performance. The FRC said it welcomed the government’s focus on remuneration and the need for companies to respect their shareholders’ views.

Based on its work in 2016 the FRC said it was important for boards to address succession planning and diversity, and be better informed about the link to strategy and business value. The FRC said it welcomed the Hampton Alexander and Parker reviews – which covered female and ethnic minority representation among top executives – and looked forward to working with them in the coming year.

In 2016, the FRC also assessed signatories to its UK Stewardship Code and encouraged them to review the quality of their statements against the principles of the Code. The regulator said that this exercise led to an increase in the number of asset managers and owners in the top tier, from fewer than 20 on first assessment to more than 80 currently.

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