That’s according to a report issued last month by the Financial Reporting Council.
The report forms the Council’s annual review of the UK Corporate Governance Code. It claims that if companies want to ‘demonstrate their positive impact on the economy and wider society’, they need to improve both governance practices and reporting.
What does this mean for boards and how can board members take a proactive approach to reporting and corporate governance?
The UK Corporate Governance Code
The UK Corporate Governance Code was updated in 2018 with changes designed ‘to help build trust in business by forging strong relationships with key stakeholders’. We looked at the implications of these updates in a previous blog.
At the time, the FRC urged companies to ‘focus on long-term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity’.
The need for boards to improve their diversity has long-been recognised – and not just as a tick-box exercise. We’ve looked previously at why diversity in the boardroom is important and can help businesses to deliver better results.
In its recent report, the Financial Reporting Council said that the 2018 changes ‘raised the bar considerably and have led to some high-quality reporting’. It also noted, however, that ‘greater focus is [still] needed on longer term sustainability including stakeholder engagement, diversity and the importance of corporate culture’.
How can companies improve their reporting?
The report assessed companies’ reporting against the 2016 UK Corporate Governance Code. It also reviewed how ‘early adopters’ of the revised 2018 Code were progressing.
It had interesting insights in the areas of:
- Incentives – the report found some good examples of reporting by companies who are increasingly using incentives that relate to non-financial matters and are grounded in long-term strategy. Remuneration and rewards can be very powerful when connected to behaviours and cultures; rewarding behaviours that are inimical to ethical approaches – even indirectly – can be detrimental to compliant cultures.
We’ve explored this before, examining how firms can balance remuneration decisions with good governance and the role incentives play in creating cultures of compliance.
- Firms’ purpose – the report says that many companies are struggling to define their purpose and identify what an effective culture means. Too many are ‘substituting slogans or marketing lines for a clear purpose’ – a superficial approach that will not deliver real, embedded improvements in culture.
The board has a clear role to play here. Setting corporate strategy and organisational purpose is one of your board’s main responsibilities; if you are struggling to create a clear strategy and purpose for your business, you can read more in our recent blog about how to build a more strategic board.
- The importance of culture in reporting – firms currently take ‘insufficient consideration of the importance of culture and strategy, or the views of stakeholders’. The report states that firms should comment on culture and the ways they are monitoring and assessing it in their reporting, but many are failing to do this satisfactorily.
- Diversity – another area where firms are falling short when it comes to reporting. The FRC notes that ‘Those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long-term value of diversity’.
- Measuring employee engagement – firms should not rely solely on engagement surveys as an effective tool to achieve insight on employee engagement and culture. While these can help, the report states that ‘they should not be used in isolation’, and instead employers should be able to ‘demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board and how this affects company decisions’.
Surveys alone are not enough; they need to be acted upon. And you need to demonstrate that any change is being driven from the very top of the organisation; the board of directors.
Taking an in-depth approach to governance
The FRC’s Chief Executive, Sir Jon Thompson commented to say that while the report did highlight some good examples of reporting and governance, ‘looking ahead we expect to see much greater insight into governance practices and outcomes reporting’.
He pointed out that ‘achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code’ and not sufficient to meet its requirements. Or, as The Times sums it up more succinctly, firms need to ‘Cut out the reporting gimmicks’.
How should boards respond to the report’s findings?
With the board ultimately responsible for firm’s reporting, regulatory compliance and corporate governance, what should your directors do to address the shortcomings flagged in the report?
The FRC says that firms should ensure their reporting provides:
- Good quality explanations
- Specificity – explanations should be specific to each company
- Insight into the company and the way it is run
- An explanation of any risks identified and mitigating actions taken
In the future, the Council says that companies should also ensure that they apply the Code’s principles ‘in a manner shareholders can more easily evaluate with a much greater focus on activities and outcomes reporting’.
This reporting should include details of how effective the board is in decision-making, and how this has led to sustainable benefits for shareholders, employees and wider stakeholders.
Identify the tools that can improve your corporate governance
Increasingly, boards are adopting technology solutions to help them to address their challenges, including governance.
Meeting the standards set in the FRC’s Corporate Governance Code means delivering on the requirements around good practice, ethics and behaviour. If you would like to know more about the ways technology can help you here, you can read more about the benefits of an online approach in our whitepaper, Board portals - what’s in it for directors? You can download a free copy of the whitepaper here.
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