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Article:

FRC’s annual review of reporting under the 2018 UK Corporate Governance Code

14 January 2020

In January 2020, the Financial Reporting Council (FRC) published its annual review of the quality of reporting against the UK Corporate Governance code (both the 2016 and 2018 versions).

The 2018 code applies to premium listed companies for years beginning on or after 1 January 2019 (read about the main changes from the 2016 Code). In this article we highlight the FRC’s findings from the FTSE 100 companies which had adopted the 2018 Code early, and the FRC’s expectations for improvements.

Early adoption of the 2018 code

The FRC found the quality of reporting ‘mixed’, with corporate culture and workforce engagement the most frequently discussed areas, and some aspects of the 2018 Code causing companies to consider what actions they need to take to ensure that they have processes in place to both apply the principles and report against the provisions.

While there are examples of high‑quality governance reporting from ‘early adopters’ of the 2018 Code, the FRC has noted there is significant room for improvement in 2020. It identified that many companies had concentrated on achieving strict compliance with the provisions, which gave little insight into their governance practices. It comments that effective application of the principles requires a broader approach than a simple ‘tick box approach’ and should offer more insight into the impact and outcomes that a company’s governance has had on its long-term success. This should include the impact on the board’s effectiveness and decision-making and how this has led to sustainable benefits for shareholders and wider stakeholders. Where companies depart from the Provisions of the Code, the FRC says they should provide compelling explanations for why non-compliance is the right approach for their particular circumstances.

The key observations and expectations from the FRC are:

FRC observations Suggested improvements and expectations
Purpose and Culture

The quality of the purpose statement varied greatly.

A number of the companies substituted what appeared to be a slogan or marketing line for their purpose, or restricted it to achieving shareholder returns and profit. This approach is not acceptable for the 2018 code.

Best practice reporting described purpose by considering it alongside culture and strategy in a way that demonstrated the company had thought about purpose effectively.
Companies are expected to have further considered their purposes and values, this should lead to significant improvements in disclosure.

The FRC was encouraged that company culture is being taken seriously by many boards. However, only a few companies had reported that they had a specific agenda item on alignment of culture with values and strategy, or receive reports on culture to aid discussions.

Better practice included reporting on some of the less positive feedback received from employee surveys and the actions taken by the board – showing commitment to values.

More detailed discussion of assessing and monitoring culture is expected - information on this can be found in the FRC’s Guidance on Board Effectiveness.

Workforce engagement
There was a lack of detailed disclosure on effective engagement with the companies’ workforce, specifically a lack of thought given to the effectiveness of the method chosen, and a lack of disclosure on how information obtained is fed into wider board discussions. The FRC will focus on how effective this engagement has been and expect disclosure of how views have been considered in board discussions and decision making, including details or real examples of what a company has done to consider and (if appropriate) take forward matters raised by the workforce.
Diversity
There was limited reporting of diversity beyond gender and some reference to ethnic diversity, and any targets were not always clear. An increase in more detailed commentary on all aspects of diversity in future disclosures including age, disability, and/or LGBT+, as well as reporting against objectives.
Remuneration

Very few committees have reported on their engagement with the company’s workforce, or disclosed a comparison of director pension rates against rates of the workforce.

Better practice examples of annual bonuses and LTIP awards disclosures included non-financial KPIs that align with long-term horizons.

More detail on both the way in which remuneration committees have engaged with the workforce and, importantly, the effect of that engagement is expected.

Disclosure of malus/clawback policy details are also expected.
Chair tenure
There are a number of chairs that have remained in post for an extended time beyond the 9 years that is prohibited by the code. Disclosure of the rationale for these situations and their proposal for the future composition of the board.
Succession planning
Reports lacked detail on succession planning, instead focusing on appointment processes. AGM notices for re-election of board members should explain why they contribute to the long-term success of the company.
Section 172 reporting

Whilst most companies identified their key stakeholders, there was limited discussion of the issues that were important to or raised by these stakeholders and, consequently, to what extent boards had considered the impact to strategy.

A good example included prompt payment ratio in their relationships with suppliers’ disclosures.
Reporting must cover the concerns raised by stakeholders, how companies have understood the issues, and how they have thought carefully about how these impact on the long-term success of the company.


Read the full review document at Annual review. Further guidance is now available as the FRC’s Financial Reporting Lab (the Lab) has published its findings about how companies might meet the needs of investors on the reporting of workforce-related issues.

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