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 Corporate Governance Code in 2020, and the FRC's expectations for companies reporting in 2021. The report is based on an assessment of the annual reports of up to 100 companies, including FTSE 350 and FTSE Small Cap companies.

Companies were reporting on their application of the 2018 edition of the Code for the first time in 2020 and overall the FRC says that reporting does not demonstrate the high quality of governance that it expects. It says that reporting often took a formulaic and box-ticking approach at the expense of effective governance and reporting.

The FRC says that it expects companies to move away from boilerplate statements and provide a more meaningful narrative in support of their application of the Code’s principles.

Other key messages from the report include:

• Compliance with the Code – The report discusses Code compliance and the provisions that companies most often said they did not comply with. The FRC expresses concern that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports. The FRC says that it expects companies to be clear and transparent about the provisions of the Code which they have not complied with.
• Purpose, culture and values – The FRC says that the quality of purpose statements was variable. In particular, a number of companies conflated purpose statements with marketing slogans, mission statements or vision statements. It also says that it expects companies to take a more rigorous approach to culture and establish effective ways of monitoring and assessing both the culture and its alignment with purpose, values and strategy.
• Stakeholders – The FRC says that companies should identify their key stakeholders and explain their relevance in the context of their strategy, as well as identifying key issues relating to each group. It also says that reporting on stakeholder engagement should include a discussion on how feedback received from stakeholders has informed company decisions and strategy. Companies should also report on how stakeholder information is passed to the board and how often the board reviews engagement methods. The report also discusses the workforce engagement mechanisms adopted by companies in line with provision 5 of the Code.
• Succession planning – The FRC says that it found little improvement in the quality of succession planning disclosures. It says that the reports it reviewed provided minimal insight into succession planning, with many focusing on the appointment process rather than providing information on how companies plan for succession.
• Diversity – The FRC says that companies should have both a board and a workforce diversity policy and that it expects companies which have not published those policies to do so in 2021. Guidance is also provided on how to improve diversity-related disclosures.
• Remuneration – Reporting on remuneration issues is of mixed quality according to the FRC. It says that improvements have been made in reporting on workforce pay, discretion, and the requirements of provision 40 of the Code, but that reporting is disappointing in relation to KPIs, pension contributions, and workforce engagement.