Lessons for all companies from the FRC review of Corporate Governance going into 2023 (no matter what size of firm you are)
January 26, 2023
In November 2022, the Financial Reporting Council (“FRC”) published its annual review of Corporate Governance Code (“the Code”) disclosures. As previously, it selected a range of 100 companies across the FTSE 350 and Small Cap markets.
Whilst much of the findings will only be interesting to fully listed businesses, there are still some important points coming out that any business, no matter if a start-up or long established, should consider as it goes into a new calendar (and often financial) year.
Firstly, and in our view most importantly, do what is right for your business and don’t just follow the herd. The FRC is at pains to point out that the Code is not a set of hard rules. It is important that you do what is right for your business and then explain why that action was taken.
In our view, this is most relevant to remuneration structures where the starting point for many is “what did I do before?” or “what is the market doing?”. Starting from this point creates a danger that an ineffective reward structure will be put in place – and in the worst cases, a structure will be designed which does not support the business’ growth agenda.
A second point that comes out from reading the report is that the concept of “stewardship” is not as strong as could be in the UK economy. Some smaller entities might dismiss this as not applying to them, given that they are “new/young” rather than “old/established”.
However, we would suggest that the most successful companies have one eye to the future and making sure that the company that they are working in is not only fit for purpose now, but will be on a sound foundation when it enters its next growth phase. An example of this, in pure remuneration terms, that we see frequently is where businesses have made long term incentive (“LTI”) awards based on the team they currently have in place and do not leave enough “headroom” for the future. Or worse, give away too much of their equity and then have to fight hard to get more back via additional performance-related LTI plans.
Finally, the review highlights that many of the businesses reviewed were good at “making statements” about the future but rarely followed them up with detailed disclosures about the impact of the disclosures made. In our experience, whether good or bad, stakeholders and particularly employees, are much more engaged in the business when they see senior management taking ownership for decisions and explaining the outcome.
Should you want to have someone help you explore your thinking on this issue, please contact Stuart James in the first instance.