The Financial Reporting Council (FRC) has published its annual report on the impact and implementation of the UK Corporate Governance and Stewardship Codes during 2016 entitled ‘Developments in Corporate Governance and Stewardship 2016’ (the ‘Report’). The aim of the Report is fourfold, namely:

  1. to give an assessment of corporate governance and stewardship in the UK;

  2. to report on the quality of compliance with, and reporting against, the UK Corporate Governance Code and the Stewardship Code (the ‘Codes’);

  3. to provide the FRC’s findings on the quality of engagement between companies and shareholders; and

  4. to indicate to the market where the FRC would like to see changes in corporate governance behaviour or reporting.

In the accompanying press release, the FRC states that it has taken steps to improve confidence in the way companies are governed against a backdrop of falling public trust in business, including the disclosure of long-term viability statements, improved risk reporting and greater focus on boardroom diversity. Although compliance with the principles of the Codes remain high, the FRC believes that more focussed reporting by boards as to how they discharge their responsibilities is necessary and has asked for more oversight powers from the government to help achieve this.

The report sets out the statistical findings of professional associations and advisers alongside FRC views on performance and areas for future improvement.

Key highlights of the Report include the following:

  1. Compliance – 62% of FTSE 350 companies are reporting full compliance with the Governance Code (up from 57% in 2015), while 90% of FTSE 350 companies are reporting compliance with all but one or two of the Code's 54 provisions;

  2. Frequent non-compliance – the Code provision most often not complied with is the requirement that at least half of the board, excluding the chairman, be independent non-executive directors. Compliance with this provision has dropped from 42 FTSE 350 companies to 26 FTSE 350 companies;

  3. 2016 AGM Season – there was reduced investor support for remuneration resolutions, as investors noted concern over a lack of transparency about the link between executive pay and performance;

  4. Clawback and malus – the majority of FTSE 350 companies have taken forward the 2014 recommendation for companies to put in place arrangements to enable them to recover or withhold variable pay. 91% of FTSE 350 companies now have some form of malus and/or clawback on the annual bonus, and 78% on long-term plans, with others expected to introduce such provisions; and

  5. Nomination committees – the nomination committee must actively align board composition with company strategy to ensure that the board has the diverse skills to ensure long-term success.

As a general point on the principle of comply or explain, the FRC found too many explanations of poor quality. The FRC considers it important that a company explains how an alternative approach is consistent with the relevant Code provision and whether it is time limited. Further, on viability statements, two thirds of sampled companies opted for a three year time horizon, with the remainder mainly electing for five years. Lack of variation in time horizons between business sectors is surprising and the FRC encourages companies to provide clearer disclosure of why the time period selected is appropriate. More generally, shareholders should engage to agree improvements to viability reporting, to stem any criticism of future boilerplate disclosures. The report makes a number of suggestions for improvement, based on research by professional firms.

As regards the Stewardship Code, the FRC noted a substantial improvement in the quality of signatory statements following its assessment of signatories’ reporting, which categorised signatories into tiers based on the quality of their Code statements, in November last year (and as reported in a previous Equity Issues in December 2016). The FRC considers that the tiering exercise proved instructive in improving its understanding of the nature and substance of signatory activity.

Following on from the BEIS Select Committee Inquiry into corporate governance, on which the FRC collaborated, the FRC anticipates consulting on changes to the Code during 2017. It also expects to consider changes to the Guidance on Board Effectiveness to incorporate feedback from its report on corporate culture, as well as to the Guidance on the Strategic Report. In light of responses to its 2015 discussion paper on succession planning, the FRC will also consider guidance for nomination committees. Finally, the FRC will consider possible revisions to the Stewardship Code during 2018.