Wednesday, 24 October 2018

UK: FRC publishes annual review of corporate governance and reporting

The Financial Reporting Council has today published its annual review of corporate governance and reporting: see here (pdf). With regard to governance it is noted that reported compliance with the UK Corporate Governance Code is high: 95% of FTSE350 companies report that they comply with all but one or two of the Code's provisions. However, the report notes (in a tone that seems stronger and more explicit than in previous years) that such high levels of compliance are not necessarily an indication of high standards of governance. It is also stated that companies remain reluctant to provide clear explanations in respect of areas of non-compliance with the Code's provisions.

It should be noted, to quote directly from the review, that the FRC's "... assessment of corporate governance is ... based largely on evidence gathered through research conducted by external parties" (p.3). This is, perhaps, surprising not least because the evidence relied upon - some of the reports on governance published by the large accounting firms - will have been prepared for a different purpose.  And, at a time when the relationship between the FRC and the accounting firms is under scrutiny, the appropriateness of such (narrow) reliance ought to be questioned.  The FRC explains it reliance on external parties' research as stemming from the fact that its monitoring of annual reports does not include corporate governance statements because it lacks the power to challenge and gain changes in such statements.  This is, to the say the least, surprising given the central role of the FRC within the UK corporate governance framework.

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