FRC update on UK Corporate Governance Code reporting

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Last week, the Financial Reporting Council (FRC) published its Annual Review of Corporate Governance Reporting. It's the second time that the FRC has reviewed how UK premium listed companies have reported on their application of the 2018 UK Corporate Governance Code (UKCGC). The review considers the clarity and quality of reporting on the UKCGC including the transparency and integrity of board decision-making and how a listed company demonstrates accountability to investors and wider stakeholders.
This update focuses on those aspects of corporate governance reporting which, in the FRC's view, could be improved. However, the FRC did note that overall it continued to see improved reporting. In particular, the FRC has seen an improvement in reporting on environmental and social issues, with better quality information on the issues under consideration and how those have been considered at board-level. So it's not all bad particularly in the circumstances of the last 12 months.
What is the key message from the FRC?
The FRC's key message is that good reporting is characterised by clear and consistent explanations, supported by real-life examples of application and cross-referencing between related initiatives and sections.
Has the FRC provided detail on its reporting expectations?
Yes. The FRC has the following reporting expectations:
The FRC has also asked companies to be clear about the following topics:
What areas for improvement were identified by the FRC?
The FRC considers that reporting could be improved in the following areas:
What does good governance reporting look like?
The FRC notes that "The best governance reporting offers transparency that goes beyond broad-brush declarations and sets out clearly and concisely how the Principles of the Code were applied and the nature of compliance with the Provisions of the Code."
The FRC wants companies to go beyond declarations of intent and boilerplate comments and focus on demonstrating the impact of actions.
How should a company explain non-compliance with the UKCGC?
An effective explanation should:
This reflects the FRC's view that "regrettably, too many companies continue not to be transparent about their compliance with the Code, thereby misleading the reader."
What guidance is available from the FRC?
In February 2021, the FRC issued Improving the quality of ‘comply or explain’ reporting which is intended to help companies improve transparency when reporting against the UKCGC. It also contains guidance on how to achieve good quality explanations when departing from the UKCGC.
How will corporate governance reporting be affected by the transition from the FRC to ARGA?
The FRC notes that it expects to have more powers to take action against those companies that fail to apply the Principles of the UKCGC or when departing from the provisions of the UKCGC do not offer an effective explanation.
The full review which runs to 53 pages is available at https://www.frc.org.uk/news/november-2021/uk-corporate-governance-code-reporting
If you would like to discuss corporate governance please contact Nick Graves, Dominic Davis, Rupert Weston or another member of the Burges Salmon Corporate Group.
Sir Jon Thompson CEO of the FRC said: "I’m pleased to say that overall we continue to see improved reporting – particularly when taking into account the testing circumstances we have lived through – but unfortunately expectations we set out in last year’s report remain unfulfilled. We saw some good quality reporting on stakeholder engagement, audit and in some areas of risk, but board appointments, succession planning and diversity reporting remains weak. And in too many cases reporting has not provided insight into the actions and outcomes of governance..."