FRC publishes first Report on the quality of corporate governance reporting by large private companies

The 2018 Regulations require UK-registered private companies with either (a) more than 2,000 employees or (b) a turnover of more than £200 million and a balance sheet of more than £2 billion, which are not otherwise required to adopt a specific corporate governance code, to publish a corporate governance statement.

Released on 23 February 2022, the FRC's Report is the result of a research project analysing 1,206 companies, aimed at:

1. identifying which companies within the scope of the 2018 Regulations provided a corporate governance statement in their 2019 annual reports and, of those that did, how many applied the Wates Principles or an alternative corporate governance code, and
2. of those companies choosing to apply the Wates Principles, evaluating the level of adherence to the ‘apply and explain’ approach and the quality of their disclosures within their corporate governance statements in terms of extent, best practices and readability.

The Report found that two-thirds of companies within the scope of the 2018 Regulations reported on corporate governance either within their directors’ report or elsewhere in their annual report. Of these, 57% relied on a corporate governance code to define their arrangements, 35% stated that they relied on alternative corporate governance arrangements and just 8% failed to report meaningfully on their corporate governance arrangements. 348 of the 1,206 companies had adopted the Wates Principles, making it the most widely-adopted corporate governance code amongst the companies analysed. The vast majority of these companies provided some form of explanation as to how each of the Wates Principles was applied. The FRC hopes its research will provide a suitable 'baseline' for future comparative analysis.

The Report concluded that, whilst disclosure practices are still in their infancy, large private companies have been providing good initial levels of disclosure in terms of general information about their formal policies. Although the FRC found relatively lower levels of disclosure when it came to how these policies are applied in practice, the results of the research appear more promising than the FRC's review of UK premium listed companies' corporate governance reporting, which found that some FTSE 350 companies treated such reporting as a "box-ticking exercise".  

Nonetheless, overall, the FRC found room for improvement in reporting by large private companies. In particular, it suggested companies subject to the 2018 Regulations should:

1. disclose more detailed information in relation to the application of the six Wates Principles in order to provide readers with a comprehensive understanding of the corporate governance arrangements in place and how these are mapped to the respective Principles;
2. discuss more instances and/or circumstances relating to a given corporate governance practice to evidence how they have applied the Wates Principles; and
3. use more cross-referencing, as in several cases the disclosure of some items could be found in other sections of the annual reports, but were difficult to find without cross-referencing.

The FRC hopes that some of the points raised in the Report will help companies, even those not subject to the 2018 Regulations, demonstrate good practice and make improvements going forward.

The link to the FRC's full Research Report can be found here.