That’s the upshot of a new report by the Financial Reporting Council, released this week.
The report, which forms the Council’s annual review of the UK Corporate Governance Code, says that companies need to improve governance practices and reporting if they are to ‘demonstrate their positive impact on the economy and wider society’.
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’. Updating the Code, the FRC urged companies to ‘focus on long-term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity’.
Reporting this week, the Council said that the 2018 changes ‘raised the bar considerably and have led to some high-quality reporting’. We looked at the implications of these changes in a previous blog.
However, this week’s report notes that, still, ‘greater focus is needed on longer term sustainability including stakeholder engagement, diversity and the importance of corporate culture’.
How should companies improve their reporting?
The report assessed companies’ reporting against the 2016 UK Corporate Governance Code, as well as reviewing the FTSE 100 ‘early adopters’ of the revised 2018 Code.
It found that:
- There are some good examples of reporting by companies who are increasingly using incentives relating to non-financial matters and are grounded in long-term strategy. (We have touched on the issue of incentives before when looking at how firms can create cultures of compliance).
- Many companies are struggling to define their purpose and identify what an effective culture means. Too many, the report says, are ‘substituting slogans or marketing lines for a clear purpose’ – a superficial approach that will not deliver real, embedded improvements in culture.
- Firms take ‘insufficient consideration of the importance of culture and strategy, or the views of stakeholders’. In their reporting, firms should comment on culture and the ways they are monitoring and assessing it, but many are failing to do this satisfactorily. Spotting the ‘red flags’ that indicate issues with culture is an essential step in addressing them. You can read more on how to identify these red flags here.
- Firms are falling short when it comes to reporting on diversity. 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’.
- 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 actable- and acted-upon.
An in-depth approach to governance is needed
Commenting on the report, the FRC’s Chief Executive, Sir Jon Thompson said that while there were good examples, ‘looking ahead we expect to see much greater insight into governance practices and outcomes reporting’.
He made the point 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’.
What reporting do firms need to provide in future?
So, what is the regulator looking for in companies’ reporting? The FRC highlights the need for:
- Good quality explanations
- Being specific – making explanations specific to individual companies
- Insight into a company and the way it is run
- Risks and any mitigating actions to be explained
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.
Make good governance more than a tick-box exercise
If you want to ensure good governance is embedded, not just in your FRC reporting, but across your entire firm, you may want to read our whitepaper, How to embed a compliance culture into your business. You can get a free copy from our online resource library.
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