Companies reporting departures from 2018 UK Corporate Governance Code provisions are providing “clear, meaningful and context-specific” explanations in their corporate governance disclosures. This is according to the Financial Reporting Council’s (FRC) latest Annual Review of Corporate Governance Reporting, its final analysis against the 2018 Code.

Key findings

The review states that the disclosure and explanation of Code departures is a strength of the current Code, allowing companies to take a more tailored approach to governance and reporting.

The FRC’s analysis identifies 25 companies that disclosed departures from at least one Code provision, most commonly audit committee composition, independence and tenure. These disclosures largely followed good practice and were comprehensive in the rationale behind the deviation, and the alternative governance arrangements the companies had in place.

However, companies fell down when it came to Principle B of the Code: “The board should establish a company’s purpose, values and strategy, and satisfy itself that these and its culture are all aligned. All directors must act with integrity, lead by example and promote the desired culture.” The FRC felt that reporting in this area was lacking across the sample of reports it analysed for the Review.

“It is disappointing to see that reporting on how directors fulfil this responsibility remains weak across much of our sample,” the Review states. “While many companies made general references to culture promotion, the majority failed to provide insight into the specific actions directors are taking to embed the company’s desired culture.”

The new Provision 29 on risk management and internal controls, which is in the 2024 Code, was also examined within the Review. More than half of the reports in the sample mentioned the new provision and many included details of their activities in preparation for the new Code.

Diversity and inclusion reporting remains consistent across recent Reviews, while audit quality review (AQR) results disclosures are increasing in quantity and quality. The FRC states that it wants to see improvements around reporting of the scope of the AQR and how findings were addressed.

“Audit committees should remember that the work of their committee, and the FRC, is to support improvements in audit quality, therefore effective use of regulator reporting is important,” the report states.

Best practice governance reporting

The Review includes several examples of best practice from various companies analysed by the FRC, and key messages for companies to consider when it comes to adherence to the UK Corporate Governance Code:

Align culture, purpose, values and strategy. The FRC looks for this as a sign that all employees and stakeholders understand the company’s direction and goals and how their role contributes to achieving those goals. 

Articulate explanations clearly. The FRC outlines four considerations for companies when explaining Code departures:

• Is it clear and appropriately justified?
• Is it a temporary deviation, or long term?
• How does it demonstrate alignment with Code principles?
• How useful is it for stakeholders?

There is no need for a lengthy explanation of how directors promote good company culture. Reporters should consider how directors engage with the workforce and stakeholders on understandings of company culture and how they model desired behaviours

Report on shareholder activities carried out and outcomes achieved. This provides more clarity to readers than listing existing policies and procedures. Likewise, reporting on board engagement with shareholders outside of formal general meetings provides useful insight on their relationship and how their various perspectives inform decision making.

When explaining assessments of directors’ time commitments, be specific. Disclose the factors considered during evaluation, instead of taking a numerical approach to overboarding.

Provide company-specific, time-relevant information on the role of the senior independent director (SID). Explain the activities of the SID during the year.