Yesterday, the Financial Reporting Council published its latest report on Developments in Corporate Governance and Stewardship. This report, which marks the 25th anniversary of the publication of the Cadbury Report, has four key aims:
- to give an assessment of corporate governance and stewardship in the UK;
- to report on the quality of compliance with the UK Corporate Governance Code and the UK Stewardship Code;
- to set out the FRC’s findings on the quality of engagement between companies and shareholders, and;
- to indicate changes in corporate governance and behaviour that the FRC would like to see occur.
The report notes that compliance with the UK Corporate Governance Code continues to be high, with 62% of FTSE 350 companies reporting full compliance with the UK Corporate Governance Code. 90% of FTSE 350 companies reported compliance with all, or all but one or two, of the Code’s provisions. However, there were some notable areas where compliance could be improved, with the provision least complied with being the recommendation that at least half the board consist of independent NEDs (26 FTSE 350 companies did not report compliance with this provision, although this was down from the 42 non-compliant companies in 2015).
Given the debate surrounding directors’ remuneration, it is unsurprising that the report notes that the 2016 AGM season saw reduced shareholder support for remuneration resolutions, with particular concern noted regarding the lack of transparency between executive pay and performance. The report notes a 24% increase in the number of resolutions with a significant minority vote against the recommendation of the board. The 2014 updated to the Code introduced new recommendations regarding the ability of companies to withhold or clawback variable pay from directors. The report notes that 91% of FTSE 350 companies have put in place a clawback provision on the annual bonus, and 78% allow for clawback of long-term plans.
Concerning amendments to the Code, the FRC has committed to not amending the Code again until 2019 at the earliest. However,it would appear that the FRC is moving away from this commitment. In the Foreword to the report, Sir Winn Bischoff, Chairman of the FRC, stated that ‘[t]he FRC stands ready to revise the UK Corporate Governance Code and its associated guidance.’ In a statement accompanying the report, Paul George, Executive Director of the FRC’s Corporate Governance and Reporting Department stated that ‘The FRC stands ready to revise the UK Corporate Governance Code and associated guidance in 2017.’The report itself states that ‘[t]his year we will review our Guidance on Board Effectiveness as part of our consultation on the UK Corporate Governance Code and associated guidance…’ This apparent change in position is likely a response to the government’s Corporate Governance Review (which I blogged about here), the results of which would likely necessitate amendments to the Code.
As regards stewardship, perhaps the most noteworthy piece of information is that the report states that the FRC will possibly revise the UK Stewardship Code in 2018. The Code is in dire need of updating, given that it is still largely based on the 2009 ISC Code (which was not regarded as overly effective in the first place), and the fact that the UK Stewardship Code itself was last updated in 2012 (and this update was relatively minor). The UK Corporate Governance Code has received regular updates (in 2012, 2014, and 2016) and it is notable that updates to the UK Stewardship Code have been much less frequent.