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FRC reports UK corporate governance standards remain high but wants improved stewardship reporting by investors

Compliance with the UK Corporate Governance Code remains high,with 90 per cent of the FTSE 350 complying with all but one or two provisions, according to the Financial Reporting Council (FRC) in its report, Developments in Corporate Governance and Stewardship 2015.  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 were again, on the whole, consistent with those of larger companies.

There has been a slight drop in strict compliance with the Code compared with 2014 but this is largely accounted for by new entrants to the market explaining evolving governance; and companies deciding to await the implementation in law of the EU Audit Regulation and Directive (ARD) requirements on audit re-tendering and rotation, the FRC said.

The quality of explanations for non-compliance has improved, according to the FRC. The FRC reported on the accounting firm Grant Thornton’s findings that almost 70% of the relevant FTSE 350 companies set out their reasons for non-compliance fully last year. The FRC compared the explanations for two areas of non-compliance this year with last year’s findings. These are the provision most frequently not complied with that at least half the board of a company, excluding the chairman, is comprised of independent non-executive directors and also the provision that a board roles of chairman and chief executive should be separate.

The FRC said there has been an overall improvement in explanations of these provisions they were better where companies depart from the Code due to force of circumstances – such as directors leaving the board at short notice. The FRC added that poor succession planning was arguably a contributing factor for a number of the companies where non-compliance was only short-term and that returned to compliance during the course of the year or were taking action to do so. Board succession is currently under an area that the FRC is trying to improve with a discussion paper published last year – the deadline for responses to this is 29th January – and the FRC said it will be doing follow-up work on this during 2016.

There have also been improvements in audit committee reports, with 72% of FTSE 350 companies now giving more detailed descriptions of the work they do compared with 65%  in 2014, the FRC said.  Audit retendering has increased with 46 FTSE 350 companies putting their external audit engagement out to tender this reporting season as opposed to 27 previously. FTSE 350 companies disclosures on external auditor appointments have risen from 2% in 2008 to over 50% in 2015.

There has been very good progress on reporting of boardroom gender diversity policies although the FRC said that a disappointing number of companies make no reference to the broader concept of diversity including race and experience. The FRC also found that there were not many companies who complied with the 2014 changes to the Code early. These changes are designed to strengthen the focus of companies and investors on the longer term and sustainable value creation.

FRC Chairman Sir Win Bischoff said, “Over the past few years, the FRC has taken a series of actions to deal with the outcomes of the global economic crisis. In 2014 we amended the UK Corporate Governance Code to improve the management and reporting of risk, and encourage companies and investors to take a long-term view. In order to help companies focus on implementing and benefitting from these changes, we will not substantially revise the Code for at least the next three years, but rather focus on market-led and collaborative initiatives on succession planning and corporate culture.”

Looking at the role of investor engagement with companies the FRC said that currently the  reporting against the Stewardship Code’s principles is of an inconsistent quality. The FRC believes its  proposal to tier signatories, announced in December last year, will promote better engagement and ensure that asset owners and managers follow-through on their commitment to the Code’s principles. However, the feedback on engagement between companies and investors was positive in 2015 the FRC said with many feeling that the quality of dialogue has improved. Last year also saw an increase in shareholder voting activities at companies meetings with 73 per cent voter turnout in the UK.

 

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