Developments In Corporate Governance And Stewardship 2015

15 February 2016

The FRC has published Developments in Corporate Governance and Stewardship 2015 (the Report). The Report examines compliance with the principles and provisions of the UK Corporate Governance Code issued in September 2012 (the 2012 Code) and comments on the early adoption of changes to the UK Corporate Governance Code introduced in September 2014 (the 2014 Code).

The Report indicates that compliance with the 2012 Code is high, with 90% (2014: 94%) of FTSE 350 companies reporting that they comply with all, or all but one or two, of its provisions. Although this represents a reduction in compliance compared to last year, the FRC notes that the quality of explanations for non-compliance with code provisions provided in the annual report has improved.

The FRC suggests that the drop in compliance results from two factors: newly listed companies coming to market without having fully completed their adoption of the 2012 Code, and FTSE 100 firms deciding to wait for the finalisation of the changes brought about by the EU’s Audit Regulation and Directive before making changes to affected governance arrangements. In the former case, the FRC questions whether these companies should have been better prepared to comply prior to listing.

Few companies have chosen to adopt the 2014 Code early. The FRC suggests that this reflects the substantial and complex nature of the changes, which were effective for periods beginning on or after 1 October 2014. It goes on to indicate, however, that the early adopters that have been identified have provided some good detail on how the period covered by the longer-term viability statement (provision C.2.2 of the 2014 Code) was chosen. Consistent with the findings of BDO’s recent research , the FRC has identified three and five years to be the most common periods covered by these statements. The FRC also notes that there has been an increase in the number of companies where longer time horizons have been incorporated into remuneration policies (eg through longer holding periods for at least part of a share award) and a significant number of companies now have clawback arrangements in place, consistent with the changes in principle D.1 of the 2014 Code.

Full compliance with revised provision E.2.2 of the 2014 Code appears to be very low. That provision now requires a company, when a significant proportion of votes have been cast against a resolution, to explain what actions it intends to take to understand the reasons behind the result when it is announced. Companies that have failed to make these disclosures during the year will need to explain the non-compliance in their annual report under the UK Corporate Governance Code’s “comply or explain” requirements.

Other observations regarding compliance with and reporting under the 2012 Code highlighted in the Report include:

  • Succession planning – Poor succession planning is suggested as a contributory factor for a number of the companies explaining short-term non-compliance with provision B.1.2 (balance between independent non-executive and other directors). Explanations could have provided greater transparency where companies considered on-going non-compliance with this provision to be appropriate to their circumstances
  • Audit tendering - Significant improvements in reporting on company policy on external audit tendering and the process by which auditor independence is assessed have been identified. However, there are mixed views on the quality of the descriptions of significant financial reporting issues considered by the audit committee and how they had assessed the effectiveness of the external audit process. The noted improvements did not flow through to the disclosure of the expected timing of the next audit tender and a significant proportion failed to say when their auditor was originally appointed. These findings are consistent with those of BDO’s 2015 survey of audit committee reports.
  • Fair, balanced and understandable - Disclosures on how boards substantiate the claim that the annual report is fair, balanced and understandable are relatively rare but the concept has had a significant effect on the presentation and cohesiveness of the annual report.

Finally, the FRC indicates that its 2016-19 strategy is to allow time for the recent changes introduced by the 2014 Code to become embedded in companies’ corporate governance arrangements. As such, other than changes necessitated by the implementation of the Audit Regulation and Directive, the FRC’s focus is likely to be on guidance and similar initiatives, rather than on further changes to the UK Corporate Governance Code.

Read the report Developments in Corporate Governance and Stewardship 2015 .

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