FRC’s corporate governance reporting review finds room for improvement

The Financial Reporting Council’s (FRC) annual review of corporate governance reporting, published Thursday, finds that while reporting has improved year on year, there are “few companies whose disclosures meet the highest standards.”

The FRC found while companies are moving toward greater transparency and more disclosure—particularly in terms of departure from the code—there is little meaningful explanation about why they have chosen to explain rather than comply.

Just 27 of the sample 100 companies claimed full compliance with the code this year, compared to 58 in 2020.

Another common failing, said the regulator, is the lack of disclosure around the outcomes and impacts of companies’ policies and practices to show how governance has improved.

The report found over half of the companies provided a statement to confirm their risk management and internal control systems are effective or that no weaknesses or inefficiencies have been identified. However, many of them do not explain how they assessed the effectiveness of these systems to justify their assessment.

Many companies provided a good level of insight into their processes to identify and mitigate risks but did not go further about how risk management could be improved by providing further information on the frequency of actions, such as how regularly directors review principal risks; how often senior managers meet with representatives from the risk committee or review the risk register; or if the chief risk officer reports to the board quarterly.

The FRC also found discussion of some risks was lacking; for instance, only 43 companies identified at least one emerging risk, and only 25 of them explained what these risks were.

The regulator highlighted companies’ minimal disclosure of board engagement with shareholders, even regarding “hot topic” issues such as environmental, social, and governance (ESG) risks. Where engagement is reported, the regulator said it “offers little insight”.

According to the report, only 52 companies explicitly reported the chair engaged with shareholders. Not a single company reported meetings with the audit committee’s chair.

Indeed, the lack of detail about how companies are trying to improve the governance issues they are discussing is a common problem throughout the report.

For example, while workforce engagement issues appear to be high on companies’ agendas, such engagement focuses almost exclusively on flexible working matters. And while the FRC said reporting on wider stakeholder engagement is generally of a good standard, there is hardly any accompanying information on the outcomes from the engagement, including feedback received, how it related to company strategy or culture, or commentary on whether the board acted on any of the issues raised (and the impact if they did so).

In a statement, FRC Chief Executive Sir Jon Thompson said, “In uncertain economic times, how companies govern themselves is more important than ever.

“Companies still need to go further in reporting how they apply the code’s principles and comply with the provisions, describing the actions and outcomes that come from them to improve market confidence and facilitate better stewardship.”

The FRC assessed 100 FTSE 350 and small cap companies. The findings will help inform the regulator’s work as it consults on revisions to the Corporate Governance Code next year.