The Financial Reporting Council ("FRC") publishes its report on developments in Corporate Governance and Stewardship
While commending companies and signatories for improvements made during 2014, the FRC is sending out a strong message that it intends to stamp out box ticking in terms of compliance and commitment to the UK Corporate Governance and Stewardship Codes and that it will undertake greater scrutiny of adherence in 2015.
It considers that some signatories are not implementing the measures necessary to follow-through on their commitment to the principles set out in the Codes and are not taking their responsibilities seriously. Simply complying without giving due consideration to what is appropriate and relevant is not in the spirit of the flexible approach inherent within the Codes. The FRC wishes to promote quality of engagement between companies and investors and increase accountability down the investment chain to clients and beneficiaries.
The key issues for companies and investors to focus on in 2015 include:
- The importance of good corporate culture and embedding sound governance behaviours throughout companies;
- Board composition (greater diversity and independence) and ensuring suitable succession planning is in place;
- Effective board evaluation and reporting including better transparency and informative reporting in audit committee reports and improved accountability to shareholders;
- Active engagement between boards and investors and improved reporting in this area;
- Early consideration of the new viability statement;
- Maintaining effective risk management and internal controls including improvements to disclosures on conflicts of interest;
- Focussing on the quality of explanations under both Codes including better explanations when companies do not comply with the Code; and
- Committing to clear, concise and up to date reporting.
There is an element of the FRC's report that will leave even the most diligent of companies and investors unsure whether the steps they are taking in order to commit to the principles are sufficient.
Boards are expected to routinely consider how effective they are at establishing good corporate behaviour throughout the company, whether they are reporting risks and uncertainties sufficiently in their annual reports, whether they are engaging in good stewardship with their shareholders, whether their explanations for not adhering with the Codes are sufficient, whether their policies should be amended in order to promote better corporate governance and independence and diversity of directors.
Institutional investors should ask whether their quality of reporting achieves the transparency of approach through the investment chain which the FRC is expecting to achieve. Signatories who have not yet revised their statements in response to the changes made to the Code in 2012 should do so as a matter of priority.
Businesses and their investors must ensure governance and control frameworks are sufficiently robust to prevent financial crime and cybercrime. Senior management are increasingly being held to account for compliance breaches relating to money laundering and terrorist financing as well as bribery and sanctions. These are areas where the financial services regulators, the Prudential Regulation Authority and the Financial Conduct Authority, and other organisations, such as the National Crime Agency and the Serious Fraud Office, are particularly active. A breach or enforcement action can undermine commercial performance and investment return significantly.
The sentiment in the FRC reports and the Codes is in keeping with moves across the financial services sector to embed accountability as well as organisational and remuneration practices designed to support risk management strategies for the sector and individual firms.
For further reading on this, and related subjects please see below:
Should you have any concerns in these areas or wish to seek guidance as to whether the steps you are taking could be improved,