February 17, 2022 UK Executives have some explaining to do
…That’s the conclusion from a recent report that suggests that over half of FTSE 100 companies are not complying with the UK Corporate Governance Code, with executives coming under the spotlight.
According to the study by Thomson Reuters, overall 60% of FTSE 350 companies do not comply with the Code. The study is largely based on an analysis of 272 annual reports and draws particular attention to executive pensions and chairperson tenure.
The study found that a third of FTSE 350 companies do not adhere to the recommendation that executive pension contributions should be in line with those of the workforce, citing some companies where executive contribution is 25% of salary compared with 5% for workers. This is an area which the Financial Reporting Council (FRC) has already identified as one of concern and the Investment Association has called on Boards to set out credible plans by the end of 2022 to close the gap.
The findings went on to show that in 19% of FTSE 350 companies the company chair had been in place longer than the recommended maximum of nine years and that 20 companies had a chair in place for over 15 years.
It may well be true that companies departing from certain elements of the Code do not achieve optimal governance outcomes, which according to the FRC includes the establishment of a “corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.” However, we remain to be convinced that focusing on pension contributions and tenure stated in annual reports are, by themselves, meaningful. As stated by the Code:
“The Code does not set out a rigid set of rules; instead it offers flexibility through the application of Principles and through ‘comply or explain’ Provisions and supporting guidance. It is the responsibility of boards to use this flexibility wisely and of investors and their advisors to assess differing company approaches thoughtfully.”
We agree. In reality, there are many reasons why companies may depart from certain elements of the Code, some of which are set out in supporting guidance (Guidance on Board Effectiveness). So such departure does not necessarily mean the company does not have good corporate governance.
In our experience, the absence of an explanation is often down to companies focusing on and giving priority to other sections of the annual report at the expense of the corporate governance section. Unfortunately, this compromises the ability of stakeholders to assess a company’s adopted approach, which in turn may give rise to the perception that the company is unable to provide an explanation because the adopted approach is arbitrary. Taking this perception one step further, what other arbitrary decisions have the company made? The potential investor relations issues are evident.
Companies therefore need to ensure the same level of attention and scrutiny paid to the numbers in the annual report (driven in no small part by auditors) is also applied to the corporate governance section, with any departure from certain elements of the Code robustly explained to facilitate meaningful assessment by stakeholders of the company’s adopted approach. Failure to do so can send the wrong message and undermine the integrity of the company’s corporate governance.
David Lau has over 15 years’ experience in the oil and gas sector, where he initially worked in the risk assessment and risk management teams for companies such as Exxon Mobil, Petro-Canada, and BHP Billiton before working as a commercial and legal services manager. David holds an MEng in Chemical Engineering, a Graduate Diploma in Law and a Postgraduate Diploma in Intellectual Property. David now supports a number of Elemental’s listed clients with company secretarial and governance advice.