Annual Review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its annual review of the quality of reporting on the implementation of the UK Corporate Governance Code. The FRC judges that companies do not provide sufficient evidence that they are compliant with the Code. In the future it expects to see much greater reporting of governance practice and outcomes. This could be an approach that spreads to other sectors of the economy.

Overview

The bodies who regulate and fund higher education typically expect providers to comply with a Code of governance. Providers normally adopt one of the higher education codes (eg. as issued by the Committee of University Chairs, or the Scottish Code). However, a provider may choose to comply with alternative Code, for example, the UK Corporate Governance Code.

How well companies comply with the UK Governance Code is of interest to specific higher education providers, but also more broadly as the FRC’s approach could influence the views on governance more widely.

Focus of the annual report

The Financial Reporting Council (FRC) has issued its annual review of the quality of the reporting against the 2016 UK Corporate Governance Code (2016 Code). The report also includes an assessment of the ‘early adoption’ by FTSE 100 companies of the 2018 UK Corporate Governance Code (2018 Code).

“Comply or explain”

To provide flexibility for individual companies, all versions of the UK Corporate Governance Code are based on the principle of “comply or explain”.

Review of the UK Corporate Governance Code

The UK Corporate Governance Code is normally reviewed by the FRC and updated every two years. The latest update was published in July 2018 and applies to premium listing companies and to accounting years on or after 1 January 2019. Many companies are therefore part-way through implementing the changes introduced by the 2018 Code.

The 2018 Code

When compared to the preceding version of the Code, the 2018 Code incorporates significant changes. It places new requirements on a company and how it is governed.

The 2018 Code is structured into five sections (eg. board leadership and company purpose), with each section containing a number of principles and associated, but more detailed, provisions.

Evidence for the review

In reviewing the implementation of the 2018 Code, the FRC examined the annual reports of FTSE 100 companies, as well as drawing on other sources of research.

FRC’s overview on the early adoption of the 2018 Code

While many companies focussed on strict compliance with the Code, their approach provided little insight into governance practices. The Chief Executive of the FRC, Sir Jon Thompson, commented:

“concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”

Further,

“while there are examples of high‑quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change."

Specific areas of concern

The FRC highlights a number of specific areas of concern, including:

1. Purpose: too many statements do not make it clear what is the company’s purpose. There was a tendency to conflate mission and vision with purpose. The FRC points out that “normally, mission and vision” rely on a company’s purpose to provide the reasons behind their goals. They suggest that “many companies have not fully considered purpose and its importance in relation to culture and strategy, nor have they sufficiently considered the views of stakeholders in their purpose statements.”
   
    
2. Culture: FRC expresses its disappointment that only a small number of boards disclosed that they had received reports on culture to aid their discussions of the subject. Given its previous work in highlighting the importance of corporate culture (eg. see, Corporate Culture and Role of Boards) this is a concern. The lack of discussion about corporate culture may be linked to the previous observation on the weak articulation of a company’s purpose. Overall, the FRC comments there was “limited discussion of assessing and monitoring culture.”
   
    
3. Chair tenure: the 2018 code sets out for the first time a maximum of nine-year length of tenure for the chair (from the date of their first appointment to the Board). The requirement is an attempt to encourage greater refreshment of boards, and the promotion of succession planning. The FRC finds that c.18 chairs have been on the board for 18 years or more.
   
    
4. Succession planning: the FRC suggests that the reports it reviewed lack detail on succession planning. The focus tended to be on the appointment process, rather than planning succession. The FRC also finds that details relating to the re-election of directors provided to Annual General Meetings (AGM), often comprised of a biography, which omitted to say anything about how the individual contributed to the company’s long-term success. The 2018 Code expects details to be provided on the “specific reasons why their (ie. a director’s) contribution is, and continues to be, important to the company’s long-term sustainable success.”
   
    
5. Diversity: all companies had a diversity and inclusion policy. However, it was not always clear whether there were targets for diversity at senior management or board level; or what actions were being taken to achieve the targets. The FRC also finds limited reporting beyond gender. (More information on Advance HE Board Diversification Resources.)

Conclusion

In future, the FRC expects companies to provide greater and more convincing detail on how they are implementing the principles and provisions of the 2018 Code. For many companies this is likely to require a significant shift in practice, and how they report on compliance with the 2018 Code in their annual report.

“Within the context of an evolving policy environment, will higher education providers have to provide more evidence on how they comply with their selected code of governance in future annual reports?”

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