February 17, 2022 Communicating governance and diversity
“The onus is increasingly on boards to communicate more detail, more clearly.”
That comment from the Quoted Companies Alliance was highlighted by us in December 2018 in an article which examined the importance of clear communication in company reporting. Three years on and whilst some improvement has been seen, the task of moving beyond tick box exercises in order to provide meaningful insights still seems to be challenging some organisations.
So much so that the FRC’s annual review of corporate reporting released on 25 November 2021 commented that the regulatory body continues to see the use of ‘boilerplate or declaratory statements’ which are ‘seldom substantiated by actions or examples, and therefore do not offer insight into company governance.’
Interestingly the information gap is not spread evenly across subject areas. The FRC particularly singled out environmental and social issues as areas in which improved reporting has been seen. It may be that this improvement has been driven by the increased global focus on environmental and sustainable issues.
However, areas such as diversity, inclusion and succession planning still seem to be lagging behind. In particular the FRC comments that: ‘There continues to be minimal information on how diversity and inclusion policies and objectives link to company strategy’ with a lack of cohesion seen between policies and succession plans. Diversity and inclusion is far more than the achieving of a quota a board level. Without robust succession planning, there is little opportunity to identify, train and challenge the next generation of board leaders.
The fifty-four page FRC report is packed with examples and best practices and we would encourage all directors to work through it and identify how their reporting matches up to expectations. We are, however, just going to highlight one further area of concern; risk planning.
The majority of the companies surveyed confirmed the board’s responsibility for setting the risk appetite of the company. However, some had not taken steps to identify emerging risk within the previous year. Others simply made what the FRC considers to be boilerplate comments to the effect that ‘actions have been or are being taken to remedy any significant failings or weaknesses identified’, whilst others failed to comment on the outcome of any review.
Effective identification and communication of risk and risk mitigation is of vital importance to investors and other key stakeholders. It helps investors to better appreciate the current and future prospects of the company as well as have comfort in the board taking appropriate actions. As the FRC’s CEO Sir John Thompson said “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.”