December 3, 2024 Corporate Governance reporting
The Financial Reporting Council’s (FRC) latest review into corporate governance reporting makes for interesting reading. Following on from the FRC’s corporate reporting review which we covered in October, the latest analysis highlights the importance of the ‘comply or explain’ approach which brings flexibility to governance reporting.
This latest annual review is particularly pertinent as it helps companies to focus in on the changes required to adapt their processes to meet new corporate governance reporting requirements which were announced earlier in 2024. These new requirements mainly take effect from January 2025; with provision 29, reporting on the effectiveness of risk management and internal controls, arriving in 2027.
Whilst none of the companies reviewed had moved to adopt the new risk reporting procedures, the FRC were encouraged to see that many companies were already updating their reporting, particularly with regard to risk mitigation. However, the FRC noted that reporting on the effectiveness of internal controls ‘remains at an early stage.’ This despite existing requirements for such reporting under the existing 2018 code. Nevertheless, the reviewers were encouraged to see that a number of companies had already started to comment on ongoing work to prepare for provision 29 compliance.
When it comes to comply or explain, the reviewers were pleased to see a sizeable fall in the number of companies which disclosed non-compliance with one or more of the provisions of the existing code. This the reviewers attributed to a growing number of companies complying with the existing provision 38 in respect of the alignment of executive pensions with those of the workforce. Chair tenure and independence, board and audit committee composition and the work of the remuneration committee also seem to be falling more in line with expectations.
Other highlights of the review include:
- Board leadership and company purpose. The review noted that reporting on company culture continues to evolve but still requires more in-depth analysis.
- The FRC noted that reporting in respect of diversity was mixed with some providing full information whilst others merely stated that they had a diversity policy or relied on generic descriptions. In addition, companies sampled rarely reported on the process or outcome of diversity initiatives.
Commenting on the review, Mark Babington, FRC Executive Director of Regulatory Standards said: “As companies prepare for the transition to the 2024 Code, we’re seeing positive signs in outcomes-focused reporting and risk disclosure practices. However, the review identifies clear areas for improvement, particularly in internal controls reporting and the quality of explanations when companies depart from the Code.”
Elemental provides advice to companies looking to strengthen their corporate governance framework and practices including the provision of bespoke governance support, board effectiveness reviews and training.
