Included in this issue: Financial Reporting Council publishes report on developments in Corporate Governance and Stewardship; ICSA and IA to help boards take account of views of employees and other stakeholders

Financial Reporting Council publishes report on developments in Corporate Governance and Stewardship

The Financial Reporting Council (FRC) has published a report which:

  • gives an assessment of corporate governance and stewardship in the UK in 2016;
  • reports on the quality of compliance with, and reporting against, the UK Corporate Governance Code (Governance Code) and UK Stewardship Code (Stewardship Code);
  • gives the FRC's findings on the quality of engagement between companies and shareholders; and
  • indicates where the FCA would like to see changes in corporate governance behaviour or reporting.

The report summarises and comments on other relevant changes during 2016 (many of which have been the subject of separate Governance & Compliance updates), including the implications of the focus on corporate governance by the government and BEIS Select Committee. Highlights from the report include:

Corporate Governance

  • Compliance with the Governance Code remains high. 90% of FTSE 350 companies report compliance with all, or all but one or two, of the Code's 54 provisions. Full compliance has risen from 57% to 62%.
  • The provision in relation to which companies do not comply the most often relates to board balance (Provision B.1.2).
  • There was generally reduced investor support for remuneration resolutions, with concern noted in relation to a lack of transparency about the link between executive pay and performance. That said, the vast majority of the FTSE 350 have taken forward the recommendations of the 2014 iteration of the Governance Code: 91% now have some form of malus and/or clawback provisions on annual bonuses and 78% on LTIPs.
  • Reporting where companies received a "significant" vote against an AGM resolution was considered "disappointing".
  • There were a "small number" of "comprehensive" reports on business viability. However, there was considered to be little variation in most disclosures between business sectors and, from the sample surveyed, a third of companies provided only basic information. The FRC thus encourage a clear rationale to be given for the choice of timeframe, what qualifications and assumptions were made, and how the underlying analysis was performed. Two-thirds of companies opted for a three year statement, the rest opted for five years.
  • Most companies are providing only "basic" descriptions of their succession policies and practice with little further elaboration. The FRC believe there is a need for nomination committees to have a more active role in the alignment of board composition with company strategy.
  • The FRC also believes that the board needs to be better informed about the link between diversity, strategy and business values.

Stewardship

  • Signatories to the Stewardship Code were tiered in November 2016. The FRC believe that the quality of signatory statements has improved substantially as a result.
  • Signatories that remain in Tier 3 will be contacted again by the FRC and given a further opportunity to improve their statements before being removed from the list in mid-2017 if they do not do so.
  • The FRC now expects continuous reporting improvements from signatories and encourages them to consider whether their statements are clear and, if not, make revisions as necessary.

FRC changes to codes and guidance in 2017 / 2018

As a consequence of the BEIS Select Committee Inquiry and BEIS Green Paper on corporate governance, the FRC expects to consult on changes to the Governance Code in 2017. Its work on culture will also lead to changes to its 2011 Guidance on Board Effectiveness, as well as to its Guidance on the Strategic Report. Guidance for nomination committees is also being contemplated in 2017, while amendments to the Stewardship Code will be considered in 2018.

ICSA and IA to help boards take account of views of employees and other stakeholders

In light of the government focus on corporate governance in listed and larger private companies, the ICSA and Investment Association (IA) have announced a joint initiative to tackle concerns that the voices of key groups such as employees, customers and suppliers are not being heard in boardrooms.

The two bodies will identify existing best practice and produce practical guidance to enhance understanding of the interests of employees and other stakeholders, in accordance with board duties under Section 172 of the Companies Act 2006.

The guidance will identify different approaches to stakeholder engagement for companies to consider, summarising the issues to be addressed and the practical steps to be taken. These will include the different approaches identified in the government’s Green Paper on corporate governance reform.

The guidance will cover:

  • the ways in which companies can identify non-executive directors with relevant stakeholder experience;
  • the processes by which boards can receive the views of their key stakeholders; and
  • how training and induction can be used to enhance directors’ understanding of their duties and the interests of, and impact on, different stakeholders.

The guidance, which will be published in the second quarter of 2017, will also offer a set of options for company reporting in this area.