‘Comply or explain’ is working, says FRC

Wednesday, December 14, 2011 | Posted by: Ben Langford
Categories: Governance, Stewardship Code, Thought Leadership | Tags: governance, FRC, Corporate Governance, FTSE 350, Corporate Governance Review, Stewardship Code, UK Corporate Governance Code, guidance, comply or explain, Turnbull, institutional investors, Financial Reporting Lab

The Financial Reporting Council (FRC), which oversees the UK’s corporate governance codes, released a new report today showing a strong uptake of new provisions among companies and shareholders. But the review also highlights some ongoing areas of concern…

The FRC’s new Developments in Corporate Governance 2011 looks at the impact and implementation of both the UK Corporate Governance Code and the Stewardship Code, which were respectively updated and launched in 2010.

Its analysis, drawing in part on the Grant Thornton Corporate Governance Review 2011 as well as discussions with companies and investors, identified high rates of compliance by companies with new provisions in the Corporate Governance Code and strong support for the Stewardship Code, with more than 230 institutional investors signing up. Against this promising backdrop, the need for continual improvement is a common theme.

UK Corporate Governance Code
A positive development is the high take-up of new provisions, such as the annual re-election of directors and externally facilitated board evaluation in the FTSE 350. This supports our view that the UK’s longstanding ‘comply or explain’ principle remains effective. As always, there remains room for improvement:

• As identified by our Corporate Governance Review, almost a third of companies who did not report full compliance provided only limited explanations and justification for their non-compliance – the FRC is currently holding discussions on companies and investors, and will shortly publish the output.
• Boards are making considerable efforts to understand and oversee the main risks facing their business – the FRC is intending to update the Turnbull guidance in this area during 2012.
• Business model reporting remains in its infancy – this has been identified as a priority report for the FRC’s Financial Reporting Lab.

Stewardship Code
Since the Stewardship Code was launched in summer 2010, there has been a wide range of interest from large and small asset managers to smaller specialised investors. The FRC’s survey of statements noted, unsurprisingly, a variable quality of reporting and identified four areas where disclosure could be enhanced:

• Reporting on how conflicts of interest are managed.
• More specific disclosures around collective engagement beyond stating membership of collective bodies.
• How proxy voting agencies are used and, in particular, how the agencies recommendations are followed.
• Improved accessibility of signatory statements, which are often difficult to locate, and contact details to facilitate engagement, which were missing on more than 40% of statements.

Corporate governance revisions in 2012
The FRC plans to make limited revisions to both codes, subject to consultation, in late 2012, as well as enhancing its guidance in other areas.

These revisions are designed to strengthen the current framework and we welcome the ongoing evolution of governance, as opposed to fundamental change. This supports the conclusions from our review that the debate – and challenge – continues.

Read more about our corporate governance work on our Governance Advisory page.

You might also find these posts useful:

* Corporate Governance Review 2011: Four areas for FTSE 350 to focus on
* Pressure remains on companies to improve female representation on boards
* Corporate governance framework for European companies: what needs to be improved?