Companies appear to be struggling with governance provisions aimed at managing stakeholder engagement and measures to limit the term of board chairs.
The news comes in new guidance from the Financial Reporting Council (FRC), the UK governance watchdog, in which it spells out how to meet the corporate governance code’s principle of “comply or explain”, and calls for more transparency in reporting.
In offering advice on reporting, the FRC shines a spotlight on areas where companies encounter most difficulty. This follows a report last November in which the FRC took a close look at compliance with the UK code.
According to the new document: “One of the most concerning findings from our review was that many companies were not transparent about their compliance with the code.
“Several companies in our sample, including some that claimed full compliance with the code, on further investigation has not acknowledged departure from one or more provisions of the code.”
Some companies fell short of describing how stakeholder interests have been considered or how they engaged with their workforces (they should be using either a director appointed by the workforces, a designated non-executive or a employee advisory panel).
It seems companies can describe what the interests of stakeholders are. “However, they do not describe how these were taken into account in board discussions and decision-making and what was the outcome,” the FRC says.
Further problems arose with reporting the tenure of board chairs. The code says the limit is nine years, but the FRC found unexplained cases of sitting chairs who had served for longer, including one who had occupied the role for 20 years.
“Companies declare compliance with this provision if the chair has been on the board for no more than nine years,” says the FRC.
“We support departures from the code when it is to facilitate effective succession planning or the development of a diverse board, but such cases should still be acknowledged as departure from the code and accompanied by an effective explanation.”
Companies also score poorly on their ability to describe the work of their nominations, audit and remuneration committee, as described in provisions 23, 26 and 41 of the UK code, provision on post-employment shareholdings and measures on executive pensions.
Mixed picture of compliance
Engagement with stakeholders and the workforce over pay is also an issue. The FRC says: “If a company has not engaged with shareholders or the workforce in relation to remuneration, it is not compliant with Provision 40, nor 41.”
November saw the FRC reveal a mixed picture of compliance and accused some companies of treating the code as a “box ticking exercises” producing reporting that is “formulaic”. In one example of poor reporting, the FRC said though many companies state the importance of diversity in the boardroom and in succession plans they “offered little explanation to set out what they are doing to deliver that.”
The FRC’s chief executive, Sir Jon Thompson, said the review highlighted examples of good reporting, but added: “It’s clear that some companies are continuing to take a formulaic approach to corporate governance driven by compliance, rather than focusing on outcomes, supported by high quality and transparent evidence.”