Must do better- FRC's 2021 review into company reporting against the Corporate Governance Code finds room for improvement

The FRC now annually reviews how UK premium listed companies have reported on their application of the 2018 UK Corporate Governance Code (the "Code") by assessing a random sample of 100 FTSE 350 and Small Cap companies. Last year's review gave a benchmark on the quality of reporting against the Code. 

In the height of the COVID-19 pandemic and its substantial impact on company governance, the FRC was concerned that companies were failing to disclose non-compliance with the Code. As a result, following the publication of its 2020 review, it issued guidance for improving the quality of 'comply or explain' reporting. Since then, it has further published three research reports which make suggestions for improved reporting on remuneration, workforce engagement and board diversity and effectiveness. As such, the FRC was expecting an increase in the number of disclosures of non-compliance.

However, in spite of the FRC bolstering its guidance to improve such reporting, its 2021 review found there is still room for improvement when it comes to the quality of explanations for instances of non-compliance with the Code. It continues to see the use of boilerplate or declaratory statements which are unsubstantiated by actions or examples and therefore useless to investors. The FRC is clear that the Code should enable companies to communicate high-quality information to stakeholders about the way in which their governance functions deliver on company purpose and strategy: boilerplate or declaratory statements without substantiation fail to offer the necessary insight. One example given was that, whilst many companies stated the importance of diversity and inclusion at board level and in the succession pipeline, few offered any meaningful explanation as to how they were putting such policies into practice.

To address these issues, the review sets out the FRC's expectations for improvement in the following areas:

• greater attention to the alignment between reported good governance and company practices and policies, strategy and business models;
• increased focus on assessing and monitoring culture by using different methods and metrics;
• better reporting of succession planning, and how this links to assuring the make-up of the board and delivering diverse challenge;
• improved reporting on outcomes and actions, rather than declarations or statements of intent without detail;
• increased focus on assessing and ensuring the effectiveness of the risk management and internal control systems; and
• better explanation of how executive remuneration is aligned to a company’s purpose, values and strategy. 

The FRC also asks that, going forward, companies be clear about:

• departures from provisions of the Code and to provide a detailed explanation;
• engagement with shareholders and the workforce in relation to remuneration, and the impact on remuneration policy and outcomes;
• the impact of engagement with stakeholders, including any areas where the company failed to meet targets;
• the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success;
• explaining diversity policies with objectives and targets and demonstrating their connection to company strategy; and
• the relationship and level of oversight between the board and committees.

The FRC's review can be found here.