Thursday 9 January 2020 12:01 am

Watchdog calls for end to tick-box approach to corporate governance

Audit watchdog the Financial Reporting Council (FRC) today said there was “significant room for improved corporate reporting” by FTSE companies.

After an examination of corporate reporting last year against the 2016 UK corporate governance code and the 2018 code which has yet to take force but has been adopted by some companies, the watchdog found that more needed to be done to improve governance and public trust in business.

Of the 288 companies reviewed, 73 per cent reported full compliance with the code, and 95 per cent said they either complied with all, or all but one or two, of the code’s 54   provisions. 

One company failed to comply with any of the nine provisions. 

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Twelve companies in the FTSE 250 had the same chair and chief executive, two of which failed to offer any rationale or mitigating arrangements for this failure to comply with the code.

“It is unsatisfactory not to offer an insight as to why they have departed from the code and whether their shareholders are supportive,” the FRC said.

The FRC said that many companies were grappling with defining purpose and what an effective culture means.

But said: “Too many [are] substituting slogans or marketing lines for a clear purpose.”

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The watchdog said there was insufficient consideration of the importance of culture and strategy, or the views of stakeholders. 

Maureen Beresford, a member of the FRC’s corporate governance team, called for companies to move away from a tick-box approach to corporate governance.

“What is lacking is a holistic approach…it’s seeing governance as a long term approach for the company rather than just looking at the code and saying ‘yes we have done this,'” she said.

The FRC also said it had found reporting on diversity was limited, but said companies that did report well “had clear plans to meet targets – beyond just gender – and understood the long-term value of diversity”.

The FRC’s chief executive, Sir Jon Thompson said: “While there are examples of high‑quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change.

“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the code and does a disservice to the interests of shareholders and wider stakeholders, including the public.

“Where companies depart from the provisions of the code they need to provide compelling explanations for why non-compliance is the right approach for their particular company.”