This week’s Equity Issues sets out a brief summary of the annual report of the Financial Reporting Council (FRC) relating to the impact and implementation of the UK Corporate Governance and Stewardship Codes during 2015.


The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. The FRC sets the UK Corporate Governance Code, the UK Stewardship Code and also standards for accounting, auditing and actuarial work.

The Corporate Governance Code is the key source of corporate governance recommendations for listed companies and consists of principles of good governance, most of which have their own set of detailed provisions, dealing with the following areas: leadership, effectiveness, accountability, remuneration and relations with shareholders. The most recent changes to the Corporate Governance Code were made in 2014.

The Stewardship Code sets out good practice for institutional investors when engaging with UK listed companies and is to be applied on a comply or explain basis. The most recent version of the Stewardship Code came into effect on 1 October 2012.

Findings of the FRC report

The report sets out the statistical findings of a number of surveys conducted by professional associations and advisers, alongside FRC views on performance by companies and stakeholders during 2015 and areas for future improvement.

Corporate Governance Code

The report's key messages relating to the Corporate Governance Code include the following:

  1. save for minor changes to reflect implementation of the EU Statutory Audit Directive and Regulation, the FRC does not intend to make any substantial Code revisions before 2019. This is to allow the complex 2014 changes to bed in and the FRC will continue to monitor adoption of those changes;
  2. while the overall quality of explanations has improved and Code compliance remains high, strict compliance with all Code provisions has slightly dropped due to newly listed companies not yet having observed all governance requirements (raising questions about whether they should have been better prepared prior to listing) and FTSE 100 companies awaiting finalisation of implementation of the EU Statutory Audit Directive and Regulation;
  3. in the year ahead, the FRC will focus on corporate culture and practices that embed good corporate behaviour. It aims to publish its findings in summer 2016 and, once that exercise is completed, the FRC intends to review its Guidance on Board Effectiveness to ensure that corporate culture is a prominent theme; and
  4. the FRC is assessing feedback to its consultation on implementation of the EU Audit Directive and Regulation and plans to release revised versions of the Code and Guidance in the second quarter of 2016. Any changes would come into force on 17 June 2016 and apply to financial years starting on or after that date.

Stewardship Code

The report's key messages relating to the Stewardship Code include the following:

  1. the report refers to the FRC's announcement that it intends to scrutinise Stewardship Code signatory statements and then contact firms to allow for improvements, before making its assessments public in summer 2016. According to the report, the announcement reflects the view that the reporting of too many signatories does not demonstrate a follow through on their commitment to adopt and report against the principles, with explanations where needed. After making those assessments public, the FRC will then review the outcome to develop any proposed revisions to the Stewardship Code required to implement the revised Shareholder Rights Directive. The FRC's main focus will be on retention of the 'comply or explain' elements of that part of the Shareholder Rights Directive that deals with transparency by institutional investors;
  2. the FRC strongly encourages investors to notify companies in advance of votes against or abstentions, following a decrease in such notifications during 2015. The FRC will look at how it can highlight best practice on new requirements for companies to provide information about engagement with investors in instances of significant votes against; and
  3. going forward, the FRC wants to ensure that its activities capture the perspectives of long-term investors and international investors active in the UK market.

Next steps

In its published Strategy for 2016/19, the FRC has said that fostering investment and the importance of effective but proportionate regulation will guide the FRC’s priorities over these three years. The FRC will concentrate on promoting a step change in audit quality and on driving up standards of governance, stewardship and reporting.

The FRC points out that its strategy for 2013/16 was driven by the lessons of the financial global crisis but believes that, now these actions having been taken, there is a need for change of emphasis and its priority now is to help companies embed the requirements that have already been introduced to ensure that the intended benefits are secured and aim to raise the quality of reporting and governance.