Thursday 15 January 2015

UK: FRC publishes annual review of governance and stewardship

The Financial Reporting Council has published its annual review Developments in Corporate Governance and Stewardship: see here (pdf). The report provides: an assessment of corporate governance and stewardship in the UK; a report on the quality of compliance with, and reporting against, the UK Corporate Governance Code and UK Stewardship Code; findings in respect of the quality of engagement between companies and shareholders; an indication of the changes in governance behaviour or reporting that the FRC would like to see; and a summary of other developments, including changes to the regulatory framework within the UK and at European level (e.g., the European Commission's Recommendation on the quality of corporate governance reporting (2014/208/EU) and the proposed new Shareholder Rights Directive). .

A few points from the report follow. The FRC believes that the quality of corporate governance in the UK is high but it nevertheless identifies areas where improvements can be made. One such area is the quality of explanations provided as part of 'comply or explain', in particular where companies explain why, in departing from the Code, their chosen arrangements are appropriate.

The role of proxy advisors is discussed in the report because of the mixed reports that FRC has received about the quality of reporting, engagement and voting outcomes which result from the relationship between some proxy advisors and their clients. The FRC will be considering what role it can play in improving engagement and communication between the parties. The FRC will also be publishing a discussion document this year on succession planning and will also begin work to assess how effective boards are at establishing company culture and embedding appropriate behaviour.

With regard to the UK Stewardship Code, the FRC is concerned that too many signatories do not do what they have signed up to do. The standard of reporting by signatories is also variable. The first half of 2015 will see the FRC begin a project on how it can best promote a culture of stewardship; it will also increase its scrutiny of adherence to the Code.

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