FRC review of corporate governance reporting: lessons for COVID-19
2 December 2020: The revised corporate governance code set new expectations for premium listed companies. However, the changes haven’t prevented the FRC’s annual criticism of corporate governance reporting.
Perhaps the most alarming finding from the FRC’s review of corporate governance reporting is that some companies are falsely claiming to be fully compliant with the code.
The new code provides a basis for more imaginative reporting but, on the whole, companies have failed to rise to this challenge. Sadly, the FRC’s familiar criticisms of companies’ over-reliance on boilerplate and inadequate explanations for non-compliance with code provisions have not gone away.
The areas of the code which are most commonly not complied with are pension contributions for directors neither currently aligned with the workforce nor scheduled to be aligned at a later date, the chair of the board not being independent on appointment, and directors being described as independent when this is not the case.
Companies which have decided to retain directors for longer than the usual nine years in order to preserve continuity during COVID-19 will need to provide detailed explanations for this decision in due course. Just referring to directors’ skills and experience is insufficient. Where possible, companies should explain when they expect to replace long-serving directors in their reports.
Although best practice is emerging around stakeholder engagement, good reporting on the outcomes arising from this engagement is hard to find. The FRC’s frustration is evident by its description of one-sided engagement as ‘lip-service.’ Stakeholders should be able to give feedback independently eg, using a hotline.
Companies may benefit from dividing stakeholders into those who impact the company and those who are impacted by the company. Taking the brave decision to report on difficulties encountered with stakeholder engagement adds depth and credibility to reports.
Of course, the workforce is a key stakeholder. The FRC review found that only 0.6% of companies have appointed a board director from the workforce. In fact, these companies have appointed two workforce directors rather than one. Most companies have chosen to designate a NED, but the FRC would like boards to clearly define this role and set expectations. Site visits by NEDs should be focused on a theme. Visits should include a Q&A with the workforce and the NED should follow-up on issues raised.
The key to good reporting on any stakeholder engagement is to demonstrate that stakeholders’ views have been listened to by showing how they have influenced decision-making, for example, how engagement with shareholders has impacted the remuneration policy. Companies which have started thinking about how they will report on their approach to COVID-19 should bear this in mind, eg the nature of companies’ engagement with suppliers may have changed during lockdown.
The FRC gives short shrift to companies that proclaim their commitment to diversity but don’t set targets beyond gender. The message is clear: companies must do better.
Thankfully, the FRC has some positive things to say about companies’ culture reports. Although a minority of companies still mistake a marketing slogan for purpose, over half the companies reviewed reported on culture in a meaningful way and an even greater proportion commented on how their values are linked to their culture. Culture dashboards have become fashionable and they include matters such as turnover and absenteeism, whistleblowing and exit interviews.
Some of the things which the FRC has to say about remuneration also offer glimmers of hope. There is a healthy trend towards non-financial KPIs and the ability of remuneration committees to exercise discretion is widely accepted.
Companies should keep these points in mind when reporting:
- Strive for transparency, clarity and integrity
- Use signposting, avoid boilerplate and ensure cohesion
- Tell a story about your company, avoid a ‘tick-box’ approach
- Explain clearly and comprehensively when you depart from the code’s provisions
- Disclose impact of actions via the use of examples.
Companies may find solace in the fact they aren’t the only ones facing increased expectations. One of the challenges for the newly formed Audit Reporting and Governance Authority is likely to be what it can do differently so that the spirit of the new code overrides the tick-box compliance culture.