Archive for the ‘UK Stewardship Code’ Category

FRC Annual Report on Developments in Corporate Governance and Stewardship 2015

In the Introduction and Overall Assessment to its Annual Report ‘Developments in Corporate Governance and Stewardship 2015’ (https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-in-Corporate-Governance-and-Stewa-(1).pdf), the UK’s Financial Reporting Council (FRC) highlighted that 2015 was a year of consolidation for the UK Corporate Governance Code (the Code) which had some significant changes made in 2014. Companies’ explanations improved in quality and there was a high level of compliance with the Code ‘with 90 per cent of FTSE 350 companies reporting compliance with all, or all but one or two, of its provisions’. The FRC’s ongoing strategy for 2016/19 is to give time for recent changes to embed and not to consider further changes – other than those arising from the implementation of the EU Audit Regulation and Directive – to the Code until 2019.

The importance of culture is recognised as the Code makes it clear that there is a role for the board in ‘establishing the culture, values and ethics of the company’ and in setting ‘the tone from the top’. The FRC plans to publish findings of a study looking at the role of boards in shaping and embedding a desired culture in the summer of 2016.

In relation to the Stewardship Code, the FRC intends to make a public assessment of the reporting of signatories – again in the summer of 2016 – as it is of the view that ‘the reporting of too many signatories does not demonstrate that they are following through on their commitment [to the Stewardship Code]’.

The next section of the Annual Report on the Governance of Listed Companies details how the UK Corporate Governance Code has been implemented during 2015 and provides an assessment of the quality of reporting on corporate governance. There is an interesting summary of the top 10 areas of non-compliance and ‘Code provision B.1.2, which states that at least half the board (excluding the chairman) should be independent, remains the lowest rated in terms of compliance among FTSE 350 companies’. In 2015, 42 FTSE 350 companies did not comply with this provision although the FRC note that ‘as with last year just under half had returned to having more than 50 per cent of the board as independent non-executive directors at the time their annual report and accounts was published. On the whole non-compliance was usually as a result of retirements rather than a specific wish not to comply.’ As well as overall compliance rates, this section of the Annual Report covers the quality of explanations for non-compliance; Code changes in 2012 including audit tendering, audit committee reporting, boardroom diversity, the ‘fair, balanced and understandable’ aspects of the company’s annual report and accounts; and Code changes in 2014 relating to risk management and internal control, remuneration, and shareholder engagement.

The following section of the Annual Report covers Stewardship and Engagement. The FRC points out that the quality of signatory statements varies considerably and that they would like to see improved reporting by all signatories across the seven principles of the Stewardship Code. The FRC will be contacting signatories individually to outline where their statements need to improve and will tier signatories publicly: ‘Tier 1 signatories will be those that meet our reporting expectations and provide evidence of the implementation of their approach to stewardship. We will pay particular attention to information on conflicts of interest disclosures, evidence of engagement and the approach to resourcing and integration of stewardship. Tier 2 signatories will be those where improvements are needed.’ As mentioned earlier, they will announce the outcome in the summer of 2016. This section of the Annual Report also covers engagement in the 2015 AGM season; company and investor expectations and reporting; collective engagement; proxy advisors; and voting and ownership.

The penultimate section of the Annual Report covers Other Corporate Governance and Stewardship Developments including Audit Regulation and Directive; Lord Davies Report on diversity (highlighting that FTSE 100 companies now have over 26% of the directorships held by women, and that whilst in 2011 there were 152 all male boards in the FTSE 350, now there are only 15 companies left with all male boards, all within the FTSE 250); the European Commission’s recommendation on the quality of corporate governance reporting (the ‘comply or explain principle’); the review of the OECD’s Principles of Corporate Governance; the European Commission’s Shareholder Rights Directive; the European Securities and Markets Authority (ESMA) Call for Evidence; fiduciary duties; the ICGN Global Stewardship Code consultation; other Stewardship initiatives; and the Capital Markets Union.

The final section of the Annual Report summarises the Corporate Governance and Stewardship Work for 2016/17. As well as mentioning the main activities, the FRC points out that its work in the ‘areas of governance and stewardship overlaps with that of many others, and we continue to work closely with market participants, representative organisations, service providers, regulators and Government departments.’

The Annual Report therefore provides both an interesting position paper in terms of where we are now in UK corporate governance and also highlights areas which the FRC will be focussing on for improvement.

As the AGM season is upon us, it will be interesting to see how companies deal with corporate governance hot topics such as the perennial executive remuneration issues – now very much in the headlines at BP and WPP – and how investors respond in terms of their stewardship role.

Chris Mallin, April 2016

The UK’s Financial Reporting Council (FRC) review of 2014

The UK’s Financial Reporting Council (FRC) review of 2014

  • on compliance with the UK Corporate Governance Code
  • a call for better commitment to the Stewardship Code
  • and focusing on corporate culture and board level behaviour

On 15th January 2015, in its annual review of developments in corporate governance and stewardship for 2014, the FRC reported that levels of compliance with the UK Corporate Governance Code had continued to increase. Reporting had become more transparent and informative, with audit committee reports much improved. Overall, levels of compliance with the UK Corporate Governance Code continued to improve, with full compliance by the FTSE 350 now at 61.2%, whilst 93.5% complied with all but 1 or 2 provisions. Reporting on board-diversity had also made good progress with a clear policy on diversity reported by 85% of FTSE 100 companies; although FTSE 250 companies have more to do, showing an improvement from only 20% to just 56%. The UK is on course, the FRC believes, to reach the Davies Report target of 25% female directors in FTSE 100 companies in 2015, with 22.8% of such directorships now held by women.

However, although the signatories to the UK Stewardship Code had increased to almost 300, with investment managers more engaged with large companies, the FRC felt that more needed to be done to ensure that action was taken on their commitment to the principles of the Code. Increasing levels of concern had also been expressed by companies and investors about the role of proxy advisors. In some cases a box-ticking approach seemed to be adopted by them and some investors, with a perceived lack of actual engagement with companies.

The report also highlighted the importance of appreciating the significance of culture and risk management in organisations, as the third edition of Corporate Governance – principles, policies and practices also emphasizes. The recent FRC guidance on risk management highlighted the need for boards to think hard about whether the culture practised within the company is the same as that which they espouse, particularly under pressure.

Commenting on board culture, FRC Chairman Sir Win Bischoff said:

‘The governance of individual companies depends crucially on the culture that is in place. The UK’s strong governance culture encourages companies to list in London and provides assurance to investors. Unfortunately, we still see examples of governance failings in this area. Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole.’

During 2015, the FRC plan to assess how effective boards are at establishing company culture and practices and embedding good corporate behaviour, and will consider whether there is a need for promoting best practice. The FRC will also be focusing on the application of the Stewardship Code and the role of proxy advisors.

Bob Tricker

20 January 2015