The overall quality of corporate governance in the UK remains high according to the Financial Reporting Council’s (FRC) Developments in Corporate Governance and Stewardship 2015 report.
There has been a slight dip in strict compliance with the Code which is largely accounted for by new entrants to the market explaining evolving governance; and companies deciding to await the implementation in law of the EU Audit Regulation and Directive (ARD) requirements on audit retendering and rotation. Nevertheless, this has been accompanied by an improvement in the quality of explanations, which demonstrates a more thoughtful approach to governance.
While there have been signs of improved engagement and more purposeful dialogue between large companies and investment managers, reporting against the Stewardship Code’s principles is of inconsistent quality. The FRC proposal to tier signatories, announced in December last year, will promote better engagement and ensure that asset owners and managers follow-through on their commitment to the Code’s principles.
FRC Chairman Sir Win Bischoff said:
“Over the past few years, the FRC has taken a series of actions to deal with the outcomes of the global economic crisis. In 2014 we amended the UK Corporate Governance Code to improve the management and reporting of risk, and encourage companies and investors to take a long-term view. In order to help companies focus on implementing and benefitting from these changes, we will not substantially revise the Code for at least the next three years, but rather focus on market-led and collaborative initiatives on succession planning and corporate culture.
We are very pleased with the response to our call to participate in the Culture Coalition. We have found a real willingness from a wide range of organisations – who might not otherwise have found reason to work together – to collaborate with us and with each other.
The UK Stewardship Code has led to improvements in the quality and quantity of engagement between investors and companies. Effective dialogue between investors and the companies in which they allocate funds is imperative to achieve sustainable long term growth in the UK economy. We wish to maintain momentum by ensuring that signing up to the Code is a true marker of commitment.”
Other key messages from the report include:
- Overall levels of compliance with the UK Corporate Governance Code remain high with 90 per cent of the FTSE 350 complying with all but 1 or 2 provisions.
- Board succession planning remains key. The FRC will be following up on its recent discussion paper in 2016.
- While there has been very good progress on reporting of boardroom gender diversity policies, a disappointing number of companies make no reference to the broader concept of diversity including race and experience.
- In the FTSE 100 there has been an increase from 37 per cent in 2014 to 51 per cent in 2015 of companies having longer share retention periods with regards to remuneration.
Reporting and audit
- The Code requirement for boards to confirm that the annual report and accounts is fair, balanced and understandable has had a significant impact on the perceived standard of reporting.
- There have been improvements in audit committee reports, with 72 per cent of FTSE 350 companies now giving more detailed descriptions of the work they do versus 65 per cent in 2014.
- Audit retendering has improved with 46 FTSE 350 companies putting their external audit engagement out to tender this reporting season as opposed to 27 previously. FTSE 350 companies disclosures on external auditor appointments have increased from 2 per cent in 2008 to over 50 per cent this year.
- Early take-up of the 2014 Code changes has been low with companies taking time to think through reporting on risk management, internal controls and the longer term viability reporting.
Stewardship and engagement
- Feedback on engagement between companies and investors was positive in 2015 with many feeling that the quality of dialogue has improved and that companies are more responsive.
- 2015 saw an increase in shareholder voting activities at companies meetings with 73 per cent voter turnout in the UK.
- In 2014 there was increasing concern expressed about the role of proxy advisors. In 2015, the FRC convened discussions between proxy advisors, company and investor representatives. All agreed that proxy advisors provide an important service, however, there are still ongoing tensions around perceived box-ticking. The FRC will continue to promote best practice in this area.
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 also 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.
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