The FRC’s annual review of reporting, following 2018 changes to the UK Corporate Governance Code shows the quality of reporting has been mixed.
In this article we analyse key elements of the FRC review
The 2018 UK Corporate Governance Code that applies to accounting periods beginning on or after 1 January 2019, is designed to build on the relationships between companies, shareholders and stakeholders and make them key to long-term sustainable growth of the UK economy.
The new Code focusses on the application of the Principles and reporting on outcomes achieved. For the Code’s Provisions, companies should disclose how they have complied with these or provide an explanation appropriate to their individual circumstances.
Key elements of 2018 UK Corporate Governance Code and summary of the Annual Review of Corporate Governance by FRC are provided in the table below:
|Key Elements||2018 UK Corporate Governance Code requirements||Early adoption of the 2018 Code (according to FRC)
|Company purpose||The board should establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned’ (Principle B)||Around half of the sampled FTSE 100 companies provided purpose statements. However, the quality of these varied greatly. There was a tendency to conflate mission and vision with purpose.
Too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit. This approach is not acceptable for the 2018 Code. Reporting in these ways suggests that many companies have not fully considered purpose and its importance in relation to culture and strategy, nor have they sufficiently considered the views of stakeholders in their purpose statements.
|Evaluating and monitoring
|The board should monitor culture and
any seek assurance that management has taken corrective action (Provision 2)
|A handful of companies included culture as a key risk; these companies recognised the importance of ensuring the right culture to retain staff, engage with stakeholders effectively, and respond to requests for information from investors.
In some cases, boards either had a committee or planned to delegate to a committee the role of leading on culture. In these cases, this responsibility was often combined with other issues such as sustainability or health and safety.
Overall, there was limited discussion of assessing and monitoring culture. Of those that did, the main tool used appeared to be employee engagement surveys, with the main metric being completion rates of such surveys. While these are beneficial, they only provide a snapshot of information and should not be used in isolation.
|Workforce Engagement||For engagement with the workforce, one or a combination of the following methods should be used:
• a director appointed from the workforce;
• a formal workforce advisory panel;
• a designated non-executive director (Provision 5)
|Analysis of the FTSE 100 showed that this area continues to be one that companies are carefully considering, with around half commenting on their current engagement with the workforce or detailing their preparation ahead of full reporting in 2020.
The reporting on current approaches to engagement was wide-ranging, with companies explaining that many different approaches were used, from staff surveys and employee AGMs to inviting employees to attend board meetings to discuss specific issues.
Practical Law’s What’s Market practice? report notes that 171 FTSE 350 companies included a statement on which workforce engagement method they have adopted or will adopt; having a designated NED was the most popular choice (at c.60%).
|Succession planning||Review existing disclosure of succession planning procedures and policies to determine whether
they are sufficiently robust and cover both the board and senior management pipeline, including
diversity. (Principle J)
|The reviewed reports lacked detail on succession planning, with many companies focussing more on their appointment process (including usage of external recruitment agencies) rather than providing information on how they plan for the various types of succession that exist. Some did set out development plans for current board members and progression plans for those looking to move to board level, but this was not something that most companies reported. Several companies only highlighted succession planning as an outcome of an external board evaluation in terms of an area to improve, including linkage to increasing diversity.|
|Maximum tenure of the chair||Consider whether the tenure of the chair exceeds (or is close to exceeding) the new nine year
maximum set by the Code and needs to be explained/justified. (Principle 19)
|When the Code was published in July 2018, there were 28 chairs in FTSE 100 with tenures of nine years and over; for the FTSE 250, it was 73. As of October 2019 these numbers decreased to 25 for the FTSE 100 and 49 for the FTSE 250 respectively.|
|Diversity||If not already provided elsewhere in the annual report, the new Code calls for detail of the policy
on diversity and inclusion and a breakdown of the gender split of the direct reports to the senior
management team. (Provision 23)
|Almost all the annual reports stated that the company had a diversity and inclusion policy, and included statistics for females at board level and senior management levels. Some companies chose to include elements of the policy within the annual report. However, there was limited reporting of diversity beyond gender.|
|Remuneration||Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company
purpose and values, and be clearly linked to the successful delivery of the company’s long-term
strategy. (Principle P)
|All sampled companies used financial KPIs to measure their annual bonus and LTIP awards. There is some movement towards the use of additional non-financial metrics, such as diversity, culture and health and safety targets. Better practice examples included strategic or individual non-financial KPIs that align with long-term horizons and specified the use of vesting periods for incentives.|
|Remuneration committee should review workforce remuneration and related policies, and the alignment of incentives and reward with culture, taking into account when setting the policy for executive director remuneration. (Provision 33)||A clear majority of companies sampled have yet to provide any information in their annual reports about engagement. Very few committees have reported early on their engagement with the company’s workforce; of those that did comment, a handful explained that they engage with the workforce through dedicated forums.|
|The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. (Provision 38)||Many FTSE 100 companies have adopted this Provision early for new appointments. For current executive directors, this was unlikely to be an immediate change due to contractual obligations.|
To conclude, the new Code applies to premium listed companies for accounting years beginning on or after 1 January 2019. Therefore, reporting will be part of the annual reports published in 2020. However, many listed companies noted in their annual reports published in 2019 the actions that they were planning to take in preparation for full reporting.
In relation to early adoption of the 2018 Code, according to Annual Review of Corporate Governance the quality of reporting has been mixed. Corporate culture and workforce engagement were the most frequently discussed areas. Also, many companies would be proposing new remuneration policies to their 2020 AGMs. Therefore, the 2018 Code changes to remuneration committee oversight will become evident in this year’s reports.
For further information about the issues raised in this article or to discuss any questions you may have, please contact Natalie Cherkas.