U.K. Corporate Governance Code gaps remain despite reporting improvements

In its annual “Review of Corporate Governance Reporting,” the Financial Reporting Council (FRC) also found companies are not providing enough information about how they review their risk management practices. Many still rely on “boilerplate” statements to attempt to show compliance with the U.K. Corporate Governance Code.

In general, while the FRC reported an improvement in corporate reporting (particularly on environmental and social issues), there was also an increase in noncompliance with the Code this year compared to last.

The FRC assessed a random sample of 100 FTSE 350 and small cap companies. Some of the key findings from the report include:

• Too many companies continue not to be transparent about their noncompliance with the Code, thereby misleading the public. The FRC said there needs to be greater clarity as to how a company is applying the Code’s principles, as well as clearer explanations where there are departures from them.
• One of the biggest areas of noncompliance was around the tenure of chairs and whether they were independent. The FRC’s analysis found 16 companies where the chair remained in post beyond nine years from the date of their first appointment to the board—a violation of the Code.
• Some companies do too little to ensure auditor independence. Four companies relied solely on a letter from their external auditor that stated—in its own opinion—the firm was independent. Of four companies to use the same audit firm for more than 20 years, three did not disclose when a tender was last held in violation of annual requirements.
• Boards might not be taking responsibility for risk oversight as carefully as they should. Some 27 companies did not go beyond confirming the board, or the audit committee, had reviewed the effectiveness of the company’s risk and internal control systems.
• Like last year, companies continue to use boilerplate or declaratory statements that are “seldom substantiated by actions or examples” and which “do not offer insight into company governance.” For example, more than a quarter of companies referred to “organizational values” but did not disclose what they actually were.
• Few companies explained how remuneration aligns with company purpose and values.
• Modern slavery considerations appear to be relatively low on most boards’ agendas, with some of the reporting being particularly “opaque.” Only 13 percent of companies explicitly discussed board-level decisions regarding modern slavery, and just 2 percent referred to the long-term impact of related issues on their business.
• Diversity and inclusion and succession planning at board level and through the pipeline continue to remain a concern. There is often a lack of cohesion between policies and succession plans. 

“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 [its] provisions,” said FRC CEO Sir Jon Thompson in a statement. “… 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.”