News
The FRC this week issued a report on the progress made on the implementation of the two codes in 2011.
Generally the FRC is pleased with the take up of the new Stewardship code with over 230 asset managers, asset owners and service providers signed up to the Stewardship Code in its first year, including most of the major investors in UK equities. On the new provisions of the UK Corporate Governance Code the FRC reports a high level of take up. For example, 80 per cent of FTSE 350 boards have put all their directors up for annual re-election, demonstrating the value of the UK Corporate Governance Code in promoting behavioural change in the boardroom.
The report highlights both the areas of success and those where more focus is required by issuers and investors and is useful reading for all those involved in IR and corporate governance.
As previously announced the FRC will be amending the UK Governance code to require companies to disclose and report annually on their policy on boardroom diversity, including gender, as recommended by Lord Davies. Although these amendments will not formally take effect until 1st October 2012 the FRC encourages all companies to disclose this information voluntarily in their next annual reports.
As to whether the Stewardship Code has yet had an impact on the quality of engagement, there are mixed signals. Many companies the FRC spoke to said that they had not seen any notable increase in the number of investors wishing to engage with them ‐ particularly outside the upper reaches of the FTSE Index ‐ but others said that where engagement took place the quality had improved, with investors showing an interest in a wider range of governance, capital raising and strategic issues. Companies perceive that there is still a long way to go before the investment and corporate governance functions within institutions become properly integrated.
The FRC also points out that there are some in the EU who would rather have a more prescriptive approach to governance so it is up to companies and investors to demonstrate that the UK’s ‘comply or explain’ approach works effectively. ‘Failure to do so could result in an approach which could be more prescriptive about the way companies organise themselves, and could give more power to regulators at the expense of shareholders.’
On reporting by listed companies the FRC emphasises the need for ‘a clear and balanced account of their performance and position’ and states that there is still too much ‘boiler-plate reporting’. On risk reporting the FRC ‘believes that this is an area where more effort is needed’. Companies are encouraged to use the new Financial Reporting Lab to test disclosure ideas, for instance on the ‘business model’.
Looking forward to 2012 the FRC will consult on an update to its guidance notes on audit committees and will consult on proposals to require clearer reporting on auditor selection. The FRC also intends to update its guidance on risk management and internal control (Turnbull Guidance). There will also be discussions about refinements to the Stewardship code, and they will continue to monitor the quality of reporting by companies and investors.
Read the full report here
Published: 15 December, 2011