News January 2017 Rebuilding trust in business requires better governance practices

Rebuilding trust in business requires better governance practices

11 January 2017


The Financial Reporting Council’s (FRC) annual report, Developments in Corporate Governance and Stewardship 2016 (PDF), is published today against a backdrop of falling public trust in business. High standards of governance are a direct driver of investment into UK companies and play an important part in our economic wellbeing. At the same time, the benefits of that investment need to be felt by society as a whole.

The FRC has taken steps to improve confidence in the way companies are governed, including the disclosure of long-term viability statements, improved risk reporting and greater focus on boardroom diversity. The FRC’s report on corporate culture highlighted the role the board should play in shaping, embedding and assessing corporate behaviours and culture.

Compliance with the principles of the UK Corporate Governance Code remains high; however, when boards choose not to follow provisions too many explanations are of poor quality. This suggests that some boards still need to do more than pay lip service to the needs of their shareholders and other stakeholders. The FRC believes more focussed reporting by boards on how they discharge their responsibilities is necessary and has asked for more oversight powers from Government to help achieve this.

The FRC’s report includes analysis of the 2016 AGM season which showed generally reduced support for remuneration resolutions and concern about a lack of transparency in the link between executive pay and performance. The FRC welcomes the Government’s focus on this important issue and the need for companies to respect their shareholders’ views.

Boards need to address succession planning and diversity, and be better informed about the link to strategy and business value. The FRC has welcomed the Hampton Alexander and Parker reviews and looks forward to working with them in the coming year.

In 2016, the FRC also assessed signatories to its UK Stewardship Code and encouraged them to review the quality of their statements against the principles of the Code. The exercise led to an increase in the number of asset managers and owners in the top tier, from fewer than 20 on first assessment to more than 80 today.

Paul George, Executive Director of Corporate Governance and Reporting, said:
“The Code is 25 years old. It has served the UK well by attracting capital and through evolving with the market and the needs of investors. We must continue to ensure that business behaviour, underpinned by strong and respected corporate governance principles, develops over the next quarter of a century and beyond. The need to maintain the UK’s position as a centre of excellence for business and a destination of choice for global investors has never been more important. The FRC stands ready to revise the UK Corporate Governance Code and associated guidance in 2017.” Some key highlights of the report include:
Compliance The number of FTSE 350 companies reporting full compliance with all provisions has increased from 57% to 62% with 90% reporting full compliance with all but one or two of the Code’s provisions.
Frequent non-compliance The Code provision most often not complied with is for at least half the Board, excluding the Chairman, to be independent, non-executive directors – 26 FTSE 350 companies in 2016 compared to 42 in 2015.
2016 AGM Season There was reduced investor support for remuneration resolutions, with concern noted over a lack of transparency about the link between executive pay and performance. 
Clawback and malus provisions The majority of FTSE 350 have taken forward the 2014 Code recommendation for companies to put in place arrangements to enable them to recover or withhold variable pay. 91% now have implemented a clawback provision on the annual bonus and 78% on long-term plans. 
Nomination Committees The committee must actively align board composition with company strategy to ensure that the board has the diverse skills to ensure long-term success. 

Notes to editors:

The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We are the UK competent authority for audit and 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 enforcement arrangements for accountants and actuaries, and oversee the regulatory activities of the accountancy and actuarial professional bodies.