FRC review of UK Corporate Governance code – and what it may mean for all companies going forward

June 1, 2021

The UK Corporate Governance Code (“the Code”) was updated in 2018, but as with all reforms of this nature, the effects could not be measured until a full cycle of disclosure had occurred.  In the last couple of weeks, the FRC have published a report (“the Report”) providing a review of how these changes have affected reporting disclosures.

The key improvements seen by the FRC, which stemmed directly from changes in the Code, related to increased levels of shareholder focused engagement and disclosure regarding alignment.  Similarly, the increased focus on directors’ remuneration has led to greater levels of disclosure.

However, the Report noted that in some ways there had been no real strides forward in the quality of reporting and there was evident frustration in the report that whilst “headline” disclosures were made, the level of detail required to explain the position was lacking.

Examples of this included:

  • the increased use of “non-financial” KPIs but no subsequent disclosure as to why a particular KPI was chosen;
  • details of shareholder engagement but few, if any, details on practical engagement with employees; and
  • an increased disclosure of the link between performance and reward, but a significant lack of disclosures to demonstrate that poor performance had not been rewarded.

Whilst it is unlikely the FRC will action anything in the next few months, they are likely to keenly observe the round of AGMs in 2021, which will deal with reporting on 2020, to see whether there have been further improvements in disclosure.

What is of interest (or concern depending on your point of view) is that, if there is not a marked progression, a possible interpretation that can be drawn by the FRC from the Report is that increased disclosure only occurs either when companies are explicitly required to do so or when it affects the owners of the business.

Following on from this, in the absence of owner activism on a large scale, the FRC may view that reform will only come with a further revision of the Code, with increased details and requirements being included.  Ironically, the imposition of more rules is likely to increase the number of “boilerplate” reports which was another complaint of the FRC in the Report.

Whilst those who work in private companies may consider the above to be only of mild interest to their position, the FRC’s observations about quoted companies should still be heeded.  As with many things, what happens in the large listed realm is taken as a template of “best practice” for the wider economy.  The Wates Corporate Governance Principles show that private companies are not exempt from coming under increased scrutiny on remuneration.  Should the current round of financial statements not improve the disclosure position in the eyes of the FRC, further, more stringent requirements could come in to affect the whole market.

If you would like further information about the points raised in this article, please contact Stuart James.

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