FTSE company compliance with UK Corporate Governance Code increases

Oct 19, 2017
But governance and reporting remain patchy, warns report

While compliance with the UK Corporate Governance Code has increased among FTSE 350 companies, governance and reporting remain patchy, according to new analysis from business and financial adviser Grant Thornton.

The firm’s 16th Corporate Governance Review, undertaken by Grant Thornton’s Governance Institute, provides an analysis of the annual reports of the companies in the FTSE 350, and reveals 66 percent declaring full compliance – a new record and an increase of 4 percentage points from last year.

But the report finds that key areas such as longer-term viability statements, internal control reporting and gender diversity see little improvement while investor engagement continues to decline, particularly for smaller companies.

Surprisingly, given the recent focus on investor engagement, the number of companies providing detailed accounts of their engagement with shareholders has fallen for the third year. Only 33 percent of the FTSE 350 provide informative insights, down from 64 percent in 2014, and only 12.5 percent report that the remuneration chair held face-to-face meetings with shareholders regarding executive remuneration. 

This drop-off is more marked among FTSE 250 firms, where direct engagement is clearly much more of a challenge: only 22 percent of them give helpful insight into engagement, down from 68 percent three years ago.

Further improvements also remain to be made when it comes to boardroom diversity. While 26 percent of FTSE 100 board roles are filled by women, 38 FTSE 100 companies have less than 25 percent female representation on their board, and the numbers are stagnating in the FTSE 250.

The picture is worse when it comes to executive and chair roles: 77 percent of the FTSE 100 and 85 percent of the FTSE 250 still do not have a woman in an executive role.

Perhaps given the increased political and media scrutiny on corporate culture, the research finds significant improvements in culture-related reporting: 39 percent of companies now provide a strong overview of the culture of their organization, up from 20 percent last year. But the number of CEOs making personal reference to culture in their opening statements remains low at only 29 percent.

Given the Financial Reporting Council’s recent conclusion that the CEO is key for setting and embedding a company’s culture, these low levels of engagement remain unsatisfactory.

Analysis of companies’ strategic reports also reveals other areas where companies can look to improve:

– Only 62 percent of FTSE 350 companies fully comply with all strategic report requirements, despite this being a legal requirement

–  30 percent of companies fail to adequately report the gender split of their workforce, despite the recent focus on this in the light of the gender pay reporting requirement.

Despite recent concerns around cyber-risk and technology, 27 percent of the FTSE 350 and 47 percent of financial industry companies do not identify technology as a key threat to their business.

Further, while technology skills are increasingly being brought onto the board (at 45 percent of FTSE 350 companies, up from 39 percent last year) to manage this growing risk, financial services, healthcare and consumer goods sectors look particularly exposed, with less than 30 percent of those that recognize they face significant technology risk having relevant skills on the board.

Eighty percent of companies – the highest-ever level – now provide good or detailed disclosures around risk management, but only 22 percent give descriptions on internal controls that deliver real reassurance to the investor.

Simon Lowe, partner and chair of the Governance Institute at Grant Thornton UK, comments: ‘Corporate scandals and escalating executive pay have increasingly eroded trust in business in recent years and, consequently, governance standards have elevated in topicality in boardrooms, the media, Whitehall and with the general public.

‘A vibrant economy is underpinned by trust in its key markets; thus it’s more important than ever for businesses to continue to improve their corporate governance. This year’s Corporate Governance Review shows some encouraging signs of progress, and it is positive to see more companies than ever before fully complying with the code.’

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