The Institute of Chartered Secretaries and Administrators (ICSA), the professional body for governance, and the Investment Association (IA), the trade body that represents UK investment managers, have launched a joint project to ensure UK PLC boards understand the views of employees and other stakeholders so these can be factored into decision making.

The aim of the project is to tackle concerns that the voices of key groups such as employees, customers and suppliers are not being heard at the highest level of British business. The plan is for the two bodies to identify existing best practice and then to produce a practical guide to enhance understanding of the interests of employees and other stakeholders in accordance with the board's duties under section 172 of the Companies Act 2006.

The guidance will cover:

  • how companies can identify non-executive directors with relevant stakeholder experience
  • processes by which boards can receive the views of stakeholders
  • how the director induction process and further training can be used to enhance directors' understanding of their duties and the impact on stakeholders.

The guidance is planned for the second half of 2017 and will offer options for companies to choose so they then report appropriately on their duties in this area.

FRC report on developments in corporate governance and stewardship in 2016

The Financial Reporting Council (FRC) has published its annual report 'Developments in Corporate Governance and Stewardship 2016'. This report looks at compliance with the UK Corporate Governance Code (the Code) and the Stewardship Code and has four purposes:

  • to give an assessment of corporate governance and stewardship in the UK
  • to report on the quality of compliance and reporting against both codes
  • to report on the quality of engagement between companies and shareholders
  • to indicate areas where changes in behaviour or reporting are required.

Reporting on compliance with the Code, the key messages in the report are:

  • Code compliance remains high, with 90 per cent of FTSE 350 companies complying with all, or all bar one or two, of the 54 provisions of the Code
  • full compliance has risen from 57 to 62 per cent of FTSE 350 companies
  • the provision most frequently not complied with is the requirement for the at least half the board (excluding the Chairman) to be independent non executive directors (though the non-compliance is down from 2015 from 42 to 26 non-compliant companies)
  • investor concern about a lack of transparency about the link between executive pay and performance has increased. The report notes a 24 per cent increase in the number of resolutions with a significant minority vote against the recommendation of the board
  • explanations of non-compliance with the Code remain, generally, of poor quality
  • 2016 was the first year of the requirement for viability reporting. The report notes that two thirds of companies sampled selected a three year time period for their viability reporting period. The FRC's view is that companies should consider further what period is appropriate and provide clearer disclosure of why the period was chosen so this does not become, effectively, a boilerplate disclosure
  • information on succession planning, a current area of focus for the FRC, is generally fairly basic, which suggests more management time needs to be spent on considering it. This links to the need to promote diversity and requires boards to be better informed about the links between diversity, strategy and business values.

Given the recent BEIS Select Committee Inquiry and the BEIS green paper, both on corporate governance, the FRC anticipates that changes will need to be made to the Code and anticipates consulting on appropriate changes during 2017.

Looking at the Stewardship Code, the following are noted:

  • as a result of the tiering exercise carried out by the FRC in November(see our previous article) where signatories to the Stewardship Code were categorised from tier 1 to tier 3 in relation to their level of reporting against the Stewardship Code's seven principles, the quality of signatory statements has improved substantially
  • signatories that remain in tier 3 (where signatories are felt not to have engaged with the spirit or reporting) will be removed as signatories in mid-2017
  • the FRC continues to think that there is too much focus on remuneration at general meetings which can distract from focus on strategy and performance
  • it is possible that revisions will be made to the Stewardship Code during 2017 to encourage further improvement in reporting.

The report also states that in 2017 the FRC Guidance on Board Effectiveness will be reviewed.

The report, Developments in Corporate Governance and Stewardship 2016, can be found here and FRC's press release here.