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Oct 24, 2017

Compliance with UK governance code rises

But little improvement on longer-term viability statements, internal control reporting and gender diversity

Compliance with the UK Corporate Governance Code has increased among large companies, but governance and reporting remain patchy, according to new analysis.

Grant Thornton’s Governance Institute has issued a report examining the annual reports of the companies in the FTSE 350. It shows that 66 percent of issuers declare full compliance with the code – a new record and an increase of 4 percentage points from last year, Corporate Secretary sister publication IR Magazine reports.

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.

Despite the recent focus on shareholder engagement, the number of companies providing detailed accounts of their interactions with investors has fallen for the third year. Only 33 percent of the FTSE 350 provide informative insights, down from 64 percent in 2014, and just 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 much more of a challenge: only 22 percent of these issuers give helpful insight into engagement, down from 68 percent three years ago, according to the report.

Further improvements also remain to be made when it comes to boardroom diversity. Although 26 percent of FTSE 100 board roles are filled by women, 38 of the 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 in regards to executive and chair roles. Seventy-seven percent of the FTSE 100 and 85 percent of the FTSE 250 still do not have a woman in an executive role.

However, the research finds significant improvements in culture-related reporting, amid an increase in political and media scrutiny on corporate culture. Thirty-nine percent of companies now provide a strong overview of the culture of their organization, up from 20 percent last year, the research finds. But the number of CEOs making personal reference to culture in their opening statements remains at only 29 percent. The Financial Reporting Council recently concluded that the CEO is key for setting and embedding a company’s culture.

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
  • Thirty 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
  • Although technology skills are increasingly being brought onto the board to manage this growing risk, the financial services, healthcare and consumer goods sectors look particularly exposed, with less than 30 percent of those that recognize they face significant technology risks having relevant skills on the board
  • Eighty percent of companies – the highest-ever level –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…This year’s [review] shows some encouraging signs of progress, and it is positive to see more companies than ever before fully complying with the code.’