November 9, 2022 Governing in the face of uncertainty
“In uncertain economic times, how companies govern themselves is more important than ever. The UK Corporate Governance Code continues to provide a clear and flexible basis to support better governance and well-run companies.”
Those comments from Financial Reporting Council (FRC) Chair, Sir John Thompson, preface the FRC’s latest annual report looking at how companies comply with the UK’s corporate governance code. In general this year’s report is broadly positive with companies appearing to have stepped up to the challenges of transparent reporting, particularly the underlying need to ‘comply or explain.’ However, as in previous years, there is still some way to go with the review concluding that “there are few companies whose disclosures meet the highest standards throughout their report.”
This year’s FRC report is particularly pertinent, given the forthcoming consultation on a revision of the code. Its findings will help to inform that revision, most particularly in those areas which have been identified as not currently fully meeting the requirements of stakeholders. And one of the key areas identified as needing ongoing improvement is the depth of explanation provided by companies. Company compliance with the code is not simply a matter of reporting that ‘we did x’. Compliant explanations need to go further, providing an understanding of why there was a need to take that action, looking at the background to the decision, the discussion and consultation process, and the outcome both for the organisation and its stakeholders.
For example, when it comes to assessing and monitoring culture, twenty companies failed to make any comment at all whilst just six of the companies reviewed provided any form of meaningful disclosure beyond simply listing review methods. Moreover, not one of the companies reviewed reported on the impact of actions which they had taken following previous reviews. Similar comments were scattered throughout the report; with the FRC highlighting in particular the minimal level of disclosure provided in respect of engagement with major shareholders.
The corporate governance code was designed to be flexed in line with individual company needs. That is what makes the code and its comply or explain principle so powerful, enabling companies to provide meaningful information without having to pack their reports with details which provide no real insight into the workings or direction of the organisation. On the other side of the coin, being free to omit certain sections of the code from annual reporting has the potential to leave investors and others with an incomplete picture of the company’s governance and direction of travel. When times are uncertain, the more certainty which can be provided through meaningful explanation and example, the better the potential relationship between companies and their stakeholders.