Many of Britain’s biggest companies are still taking a “tick-box” approach to try to achieve full compliance with the U.K.’s Corporate Governance Code rather than provide any “meaningful” explanation of how they follow the principles in practice, says the Financial Reporting Council’s annual review.
The report says while the quality of corporate reporting largely stayed the same, many companies “simply concentrated on achieving strict compliance with the Code’s provisions,” which gave “little insight into governance practices.”
The regulator also found while the majority of companies declared themselves fully Code compliant, “many annual reports lacked information on the outcomes of governance policies and practices, including any areas for future improvement.”
“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public,” said the FRC’s CEO Sir Jon Thompson in a statement.
Under the Code, companies are meant to comply with its provisions, or provide “compelling explanations” as to why they do not. The FRC, however, still found such explanations lacking in key areas, such as in those cases where companies had less than half of their boards comprised of independent non-executive directors, where former CEOs had gone on to become chairmen, or where chairs had been in place for 18 years or more—far exceeding their usual terms.
“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”
Sir Jon Thompson, CEO, FRC
The review also examined companies’ compliance with the revised version of the Code, published in 2018 although it won’t apply to most companies’ reporting timeframes until this year. The latest version is meant to encourage companies to consider the long-term viability of their businesses and their underlying risks, as well as have greater regard for the interest of stakeholders, including employees.
Among some of the early adopters, the FRC found some good examples of reporting by companies that are increasingly using incentives relating to non-financial matters and long-term strategy. But it also found companies are still assessing their viability and resilience over three-year periods rather than longer term and that there is “insufficient consideration” of the views of stakeholders or the importance of culture and strategy—the latter a topic the FRC has been keen to promote rigorously since it published its guidance in 2016, called “Corporate Culture and the Role of Boards.”
As a provision in the 2018 Code, the FRC says “the board should establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned.” It discovered, however, “too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit,” which it described as “unacceptable.”
The agency also was disappointed only a small number of boards disclosed they already receive reports on culture to aid discussions, and only a few reported they had a specific agenda item on alignment of culture with values and strategy. It also found there was “limited discussion of assessing and monitoring culture” except through measuring how many employee engagement surveys had been completed.
The review also found “limited” reporting on diversity and little discussion as to how companies chose which methods they would use to improve engagement between boards and the workforce or how success might be measured.
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