News January 2015 FRC reports on better compliance with UK Corporate Governance Code and need for improved adherence t

FRC reports on better compliance with UK Corporate Governance Code and need for improved adherence to the UK Stewardship Code

15 January 2015

PN 03/15

FRC to focus on company culture and behaviour

Levels of compliance with the UK Corporate Governance Code have continued to increase. Reporting has become more transparent and informative, with audit committee reports and diversity reporting, particularly improved.

The Financial Reporting Council’s (FRC) annual review of developments in Corporate Governance and Stewardship for 2014 (PDF) has seen an increase in signatories to the Stewardship Code with signs of better engagement with large companies by investment managers. However, more needs to be done to ensure asset owners and managers follow-through on their commitment to the principles set out in the Code.

The report highlights the importance of good culture within organisations. Commenting on board culture, FRC Chairman Sir Win Bischoff said:

“The governance of individual companies depends crucially on the culture that is in place. The UK’s strong governance culture encourages companies to list in London and provides assurance to investors. Unfortunately we still see examples of governance failings in this area. Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole. This requires constant vigilance.

Changing culture is not an easy task. Our recent guidance on risk management highlighted the need for boards to think hard about how they can better assess whether the culture practised within the company is the same as that which they espouse, particularly under pressure.

During 2015 the FRC will assess how effective boards are at establishing company culture and practices, and embedding good corporate behaviour, and will consider whether there is a need for promoting best practice. We will continue to address emerging governance issues while assessing the impact of recent Code changes.”

Other key messages from the report include:

Governance and reporting

  • Overall levels of compliance with the UK Corporate Governance Code continue to improve with full compliance by the FTSE 350 now at 61.2% and 93.5% complying with all but 1 or 2 provisions.
  • There have been improvements in audit committee reports, with good examples of greater transparency and informative reporting. The Financial Reporting Lab ‘Reporting of Audit Committees’ has been helpful to companies in this matter.
  • There has been very good progress on reporting on diversity policies in the FTSE 100 – 85% now have a clear policy – but the FTSE 250, while improving from 20% to 56%, have more to do.
  • The UK is on course to reach Lord Davies target of 25% FTSE 100 female directors in 2015, with 22.8% of directorships now held by women. The percentage of female executive directors has started to rise having stagnated at 5-6% for many years.
  • Improving the executive pipeline in connection with the wider diversity issue remains a priority. The FRC is currently undertaking a project to identify and spread best practice for high quality succession planning.

Stewardship and engagement

  • The UK Stewardship Code has almost 300 signatories; despite some increases in the quantity and quality of engagement, not all are following through on their stewardship responsibilities.
  • There are some signs of improvement, with mandates increasingly referring to stewardship and reports of better proactive engagement by companies and investors over the 2014 AGM season.
  • The FRC is concerned that signatories are not reporting effectively across the seven principles of the Code, with appropriate explanations a particular point of weakness, and are not keeping their statements against the Code up to date. Disclosures on conflicts of interest also continue to be of concern.
  • Increasing levels of concern have been expressed by companies and investors about the role of proxy advisors, particularly in terms of a perceived lack of engagement with companies and a box-ticking approach by them and investors.

In 2015 the FRC will continue to focus on the issue of company culture and behaviours, as well as the application of the Stewardship Code and the role of proxy advisors.

Notes to editors:

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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Alana SinnenCommunications Manager