FRC annual review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its Annual Review of the UK Corporate Governance Code.

The report discusses the quality of reporting against the 2016 edition of the UK Corporate Governance Code in 2019, and the FRC's expectations for companies reporting against the 2018 edition of the Code this year.

Key messages from the report include:

• Compliance with the Code – The Report notes that a significant majority of companies claimed full compliance, or near full compliance, with the provisions of the 2016 Code last year. The FRC says that it appears that many companies simply concentrated on achieving strict compliance with the provisions of the Code, and that this approach gave little insight into governance practices. It encourages more thoughtful reporting on the application of the Principles in the 2018 Code.
• Purpose and culture – Principle B of the 2018 Code states that the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. The FRC notes that those companies which discussed purpose in their annual report last year tended to conflate mission and vision with purpose. It also notes that some companies substituted what appeared to be a slogan or marketing line for their purpose, which the FRC says is not acceptable. In relation to culture, the FRC notes that a number of companies discussed culture in their annual reports, but there was limited discussion of monitoring and assessing of culture.
• Workforce engagement – The 2018 Code places greater emphasis on workforce engagement by the board. The FRC says that 2020 reports should include details or real examples of what a company has done to consider, and if appropriate, take forward matters raised by the workforce.
• Section 172 reporting – The FRC says that many companies had identified their key stakeholders in the annual report in 2019 and had reported on their engagement activities. However, the FRC says that there was limited discussion of the issues that were important to or raised by stakeholders, and consequently to what extent boards had considered these and the impact they had made to strategy.
• Succession planning and director re-election – The FRC says that many reports lacked detail on succession planning. It also notes that there was varying compliance with provision 18 of the 2018 Code, which requires the Notice of AGM to include the specific reasons why a director's contribution is, and continues to be, important to the company’s long-term sustainable success.
• Significant votes against resolutions at shareholder meetings – The FRC expects companies to view all types of votes (including abstentions) when considering whether there has been any significant minority dissent to a resolution, thereby allowing them to engage with shareholders appropriately.

The Report also notes that the FRC will update its Guidance on Risk Management, Internal Controls and Related Financial and Business reporting in due course.