U.K. corporate watchdog rips company reporting as ‘box-ticking exercise’

In its latest “Review of Corporate Governance Reporting,” the Financial Reporting Council (FRC) says some companies continue to treat the UK Corporate Governance Code as a “box-ticking exercise,” adding it was “surprised that in many cases corporate governance reporting was not coherent and cohesive.”

Too often, says the FRC, “the objective of reporting appears to be to claim strict compliance with the Code through box-ticking compliance rather than through effective governance and reporting.”

The FRC has outlined several key areas in which it wants to see improvement in the coming year and where it will keep a sharp eye on the quality of reporting and risk disclosure—namely, Brexit, COVID-19, and climate change.

The regulator also complains companies are keen to talk up their commitment to “hot topics” like diversity and culture but fail to explain what they are actually doing to promote, assess, and measure their progress in practice. The report found only 52 percent of companies reviewed commented on their culture in a meaningful way, for example

The FRC also slammed some companies for using phrases akin to “marketing slogans” to describe their purpose and business strategy. In fact, the FRC found 76 percent of the companies reviewed do not clearly describe how boards satisfied the alignment of their purpose with their business practices.

“This approach is a disservice to the interests of shareholders and wider stakeholders, and ultimately is not in the public interest,” said FRC Chief Executive Sir Jon Thompson.

This is the first year in which all U.K. premium listed companies reported on their application of the 2018 UK Corporate Governance Code.

The FRC is concerned that “an unexpectedly high number” of companies in its sample of 100 businesses claimed full compliance but could not demonstrate this in their reports. For example, 43 companies in the sample did not report noncompliance with the Code’s provision regarding pension contributions for directors: the regulator found executive pensions were neither currently aligned with the workforce, nor scheduled to be aligned at a later date, or were not fully disclosed.

The FRC also found several familiar examples in which companies have declared noncompliance but still offered very little explanation that was not “boilerplate.” Key among these are a failure to appoint independent chairs; chairs being in post for more than nine years; and the inability to ensure half the board is made up of nonexecutives.

The review found companies were better at commenting on stakeholder engagement, but the FRC said it was not clear how issues were raised to the board level or how any discussions of such matters affected decision-making. Likewise, while many companies stated they had considered wider (workforce) remuneration when setting executive pay polices, the FRC said there was “almost no discussion” of how the new policies had been debated or explained to shareholders and wider stakeholders.

The review found the strongest and most insightful reporting came from companies that described not only the initiatives that were introduced and processes that were followed but also their outcomes and impacts on the business.

In the future, the regulator wants companies to embrace the flexibility the Code provides and explain meaningfully why they might need to depart from the Code’s provisions in the best interests of the company. Currently, says the FRC, “too often, boards appear reticent to use this opportunity.”

It also wants asset managers and investors to force better company reporting once the beefed-up Stewardship Code takes effect next year.

The FRC has outlined several key areas in which it wants to see improvement in the coming year and where it will keep a sharp eye on the quality of reporting and risk disclosure—namely, Brexit, COVID-19, and climate change.

The FRC also warns it will review how directors are discharging their duties under Section 172 of the Companies Act (2006), which relates to how boards promote corporate success. In particular, the regulator will monitor the quality of stakeholder engagements, the extent to which stakeholder feedback has informed board decisions, and how effectively companies are responding to concerns raised.