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FRC encourages better comply or explain disclosure and improved investor transparency

PN 111
19 Dec 2013

One year on from key updates to the UK Corporate Governance and Stewardship Codes early indications are that companies are responding in a positive manner to the changes introduced by the Financial Reporting Council (FRC) in October 2012. While most companies are only required to report formally in 2014 on how they have applied the 2012 version of the Corporate Governance Code, many are already disclosing their boardroom diversity policies and there has been an increase in the level of audit tendering activity. There has been an uptake in signatories to the Stewardship Code with signs of better engagement with large companies by investment managers.

The findings are set out in the FRC's annual review of the Corporate Governance and Stewardship Codes for 2013, which is published today. The report shows that early adoption of new reporting recommendations on the activities of the audit committee and confirmation that reports and accounts are fair, balanced and understandable has been less widespread. Anecdotal evidence suggests that many companies are however reviewing their processes for making these disclosures in preparation for doing so in the next report.

Baroness Hogg, FRC Chairman said:

“Companies and investors need to demonstrate that there is substance behind their statements of good intent. While both have made progress in this regard, there is clearly more still to do.

Notwithstanding the high levels of compliance with the UK Corporate Governance Code, the variable quality of explanations remains its Achilles heel. While companies are getting better at describing their actual governance arrangements, many still struggle to articulate clearly why they have chosen to deviate from the Code and we would recommend that companies refer to FRC Guidance released on this.

Investors, meanwhile, need to aspire to the same level of transparency as they themselves expect of the companies in which they invest. Many statements on the Stewardship Code give little insight into investors’ actual practices”

Corporate Governance Code, other key findings:

  • There are high levels of compliance with the new recommendations added to the UK Corporate Governance Code in 2010, including the almost universal adoption of annual director elections among FTSE 350 companies.
  • There have been many good examples of reporting by mid and small-cap companies, but in general their reporting is less informative than that produced by larger companies.
  • Companies should focus on board succession planning which is often highlighted as requiring attention during external effectiveness reviews. The FRC will undertake a project in 2014 to identify good practice to assist companies in meeting the Code principles on succession planning.
Stewardship Code, other key findings:

  • The Stewardship Code now has nearly 300 signatories, of whom around two-thirds are asset managers. Between them, current signatories own or manage a significant proportion of UK listed equities and have the potential to become the critical mass of investors needed to oversee and engage with companies with the aim of achieving a sustainable return to savers.
  • There are signs of  growing demand from owners for their investment managers to apply a stewardship approach - more mandates and Requests for Proposals now refer to stewardship, and owners are reportedly more demanding with the quality of information they receive from their managers – but there remain many real and perceived barriers to effective stewardship.
  • The quality of reporting by Stewardship Code signatories remains variable. Nearly half of the signatories to the Code have not yet updated their public statements over a year after a revised edition of the Code took effect in October 2012. The FRC is considering mechanisms for ensuring that statements are complete and up to date, and possible sanctions if they are not.

There are some encouraging signs that more engagement on a wider range of issues is taking place between large companies and their major shareholders. However, this is not the case across the listed sector as a whole, and there are real concerns of an emerging “engagement deficit” affecting mid-market companies. The FRC believes that a lack of direct contact with shareholders feeds the perception on the part of many companies that proxy advisors wield undue influence over voting outcomes. It is important for companies to have a better understanding of how proxy advisors carry out their research and what they can expect in terms of communication.  The FRC supports the direction of travel of recent industry initiatives and is calling for greater oversight.

Notes to editors:

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

  2. The FRC is currently considering possible changes to the UK Corporate Governance Code for 2014 which will be consulted on in Q2 of 2014.

  3. All Press enquiries should be directed to: Peter Timberlake, Head of Communications on telephone: 020 7492 2397/ 07768 502332, or email Or to Sophie Broom, Communications Executive, on telephone: 020 7492 2395/ 07771 808464 or email:

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