Almost two-thirds of FTSE 350 compliant with new corporate governance code

UK companies are largely meeting new corporate reporting requirements arising from the Financial Reporting Council’s changes in 2018, but need to demonstrate the link between intention and action more explicitly, research by EY has found

Analysis of 100 FTSE 350 companies’ annual reports found that 61% had complied with all provisions of the new UK corporate governance code, while 80% had complied with all but one provision. The 2019-20 annual reports were the first to be affected by the reforms.

The highest rate of non-compliance related to independence and employee engagement. EY’s review found that 9% of companies were not compliant with requirements to ensure that executive pension contribution rates were aligned to employee contribution rates, 8% were non-compliant with chair tenure requirements, while 6% were non-compliant with board, chair or remuneration committee independence requirements.

Mala Shah-Coulon, EY’s head of corporate governance, said: “The new code and related regulations place significant new requirements on companies, that have implications not just for reporting but the underlying governance processes too.

‘Covid-19 has been a litmus test, forcing companies into action and bringing purpose, culture and stakeholder engagement – key aspects of the 2018 code – to the fore.’

Looking ahead, EY said its findings indicated more work is needed to turn intent into action in these areas.

The new Section 172 (1) statement requires companies to describe how directors have had regard for stakeholders when making principal decisions. However, EY’s review found that 45% of the companies sampled did not provide examples or case studies to illustrate this.

Many of the FTSE 350 companies reviewed had weak links between their stated purpose and the strategic objectives outlined in their annual report. While 86% of companies have a purpose statement, very few articulate the link to their business strategy.

Shah-Coulon said: ‘Purpose statements in an annual report can sometimes read like they are interchangeable between companies and industries. Although much time can be spent on crafting purpose statements, arguably their wording is less important than the ability to demonstrate how the purpose has been implemented.

‘Companies need to report the actions they have taken to put their commitments and stated philosophy into action.’

There was also room for improvement when it comes to reporting on ethnic minority diversity, with just 12% of the companies sampled including data on the ethnic minority diversity of their board in their annual report.

By contrast, 56% report on the make-up of their board beyond its gender diversity, but these additional metrics tend to be limited to factors like nationality, tenure and age.

Shah-Coulon said: ‘FTSE 100 companies have just one year left to meet the Parker Review’s recommendation of having at least one person of colour on their board by 2021 while FTSE 250 companies have until 2024.

‘The Parker Review’s February 2020 update report found that 41% of the FTSE 350 companies who took part in the study had an ethnic minority director on their board.

‘There is therefore a disconnect between practice and reporting and it is important that companies disclose their progress and the concrete actions that are needed to meet these goals by the deadlines.’

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