Too many companies are still adopting a ‘box ticking’ formulaic approach to corporate governance reporting, the Financial Reporting Council (FRC) has warned
As result, the regulator warns companies are failing to meet stakeholders’ expectations in their communications about how their governance functions deliver a company’s purpose and strategy.
The regulator’s review of a random sample of 100 companies, including representatives from the FTSE 100, FTSE 250 and small cap companies, showed mixed responses to implementing the revised UK corporate governance code.
It identified inconsistencies across the board in how well entities explained how their governance worked, and a failure to explain the company’s purpose and how it is aligned with its culture and strategy.
The FRC’s review found that corporate governance reporting failed to live up to stakeholder expectations. For example, many companies stated the importance of diversity at board level and in the succession pipeline but offered little explanation to set out what they are doing to deliver that.
The regulator said it found examples of better reporting on stakeholder engagement, but remained concerned that some companies continue to reply on the reporting process rather than substance. In many cases, it was not clear how issues were raised to the board level, and how that then affected decision-making.
As a result of its findings, the FRC has published expectations for improvement in a number of areas.
It wants companies to provide clear and meaningful explanations of how they achieve good governance standards in line with the flexibility offered by the code.
Companies must clearly show the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
There needs to be better assessment and monitoring of culture, including consideration of methods and metrics used.
Companies should be demonstrating their commitment to diversity and inclusion through actions, such as improved succession planning and recruitment from diverse talent pools.
Sir Jon Thompson, CEO of the FRC, said: ‘Today’s review highlights many examples of excellent reporting but it’s clear that some companies are continuing to take a formulaic approach to corporate governance driven by compliance, rather than focusing on outcomes, supported by high quality and transparent evidence.
‘This review sets out clear expectations to address where company reporting falls short, so that it can better meet the interests of not only a company’s shareholders but its wider stakeholders as well.’