The FRC (Financial Reporting Council) Review of Corporate Governance Reporting published in November 2021, continues to document the slow glacial creep towards better corporate governance reporting.
We have as Boards, a period of grace to ‘get our act together’ and improve the consistency and general standards of Board Reporting on governance matters in the Report and Accounts. Or it could it be taken out of our hands by the newly created Audit, Reporting and Governance Authority (ARGA).
The Report highlighted the lack of illumination of the Boards reporting on governance matters, with a patchwork of minimal, lawyer driven ‘what’s the least we have to say for this compliance point’. This contrasts against the FRC’s desire to see a coherent, integrated and strategic approach to governance development reporting.
Review of Corporate Governance Reporting PDF
While there are notable exceptions of companies who are rising to the spirit and flexibility of ‘comply and explain, by “provided insight into the actions and outcomes of governance, the majority are not. This undermines the objective of providing “investors and wider stakeholders with confidence that the company leadership is addressing the material governance issues that the company is facing.”
In what is probably the penultimate report prior to a transition to the Audit, Reporting and Governance Authority (ARGA) taking over from the FRC (Financial Reporting Council) in 2023, there is a polite enjoinment for an improvement in standards and consistency of reporting.
While the FRC is pleased to see a continuing improved reporting, especially in the context of the Covid Pandemic, there is an explicit marker for the future and the highlighting of the opportunity for companies to undertake a clear and defined improvement in governance reporting.
“As the FRC transitions to ARGA we will continue to work with companies to deliver the highest standards of practice and reporting, going beyond declarations of intent or boilerplate comments but clearly demonstrating the impact of actions.”
As we head to a life with an ‘Independent Regulator’ it is time for Boards to look up and provide a consistent base of reporting so investors can easily read, understand and rely upon the statements of the Board and not have to ‘interpret and decipher the runes’ of corporate governance reporting. This is important work to do before the new ARGA hardens its views and flexes its newfound powers.
In particular, the often-cited excuse of the extra expense of Reporting, has little validity, as the cost of expensive ‘boiler plating’ is equally as harsh. Indeed, the lack of consistency of reporting demonstrates Boards who have handed over their responsibilities to the lawyers and ‘minimalists’ and are encouraging a ‘dumbing down’ of our corporate reporting. As the new Regulator gains traction, the excuses will become less meaningful and while the current ’system’ lacks any meaningful sanctions for non-adherence to standards and good practice, the new ARGA framework will have the ‘powers’ and ‘structure’ to quickly respond to both a crisis of confidence and a general reluctance to improve.
It is also important that our established and mature companies have a level playing field in the level and consistency of reporting. The current voluntary, unspecific reporting standards leads to a slow pace, no one wanting to be the exception and brake on over-reporting, with the bulk of the market waiting to see how things develop. With some notable exceptions of good practice, this reluctance to improve is especially true of the current FRC ‘bugbear’ of clarity of recommendations and actions. Instead when asking ‘what is best practice?’, the standard question is usually, ‘what is everyone else doing?’, which is nothing, ‘so why should we?’. A movement towards what are fairly clear ‘requirements’ from the FRC, with the certainty of sanctions, should motivate everyone to move at a more rapid and similar pace, with the few ‘laggards’ being the exception.
The FRC has sent a clear message of what it is looking to see from our established companies as stated in the 2021 Report:
“Unfortunately, as last year, we continue to see the use of boilerplate or declaratory statements. These statements are seldom substantiated by actions or examples, and therefore do not offer insight into company governance.”
“There is still room for improvement in relation to the quality of explanations.”
And the FRC set out its future expectations for the next round of reporting.
Greater attention to the alignment between reported good governance and company practices and policies, strategy and business models.
Increased focus on assessing and monitoring culture by using different methods and metrics.
Better reporting of succession planning, and how this links to assuring the make-up of the board and delivering diverse challenge.
Improved reporting on outcomes and actions, rather than declarations or statements of intent without detail.
Increased focus on assessing and ensuring the effectiveness of the risk management and internal control systems.
Better explanation of how executive remuneration is aligned to a company’s purpose, values and strategy.
Identification of where there are departures from Provisions and providing a detailed explanation.
Engagement with shareholders and the workforce in relation to remuneration, and the impact on remuneration policy and outcomes.
The impact of engagement with stakeholders, including any areas where the company failed to meet targets.
The impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
Explaining diversity policies with objectives and targets and demonstrating their connection to company strategy.
The relationship and level of oversight between the board and committees.
The new ARGA regime not only ups ‘the reporting game’ to an Independent Regulator, but it also increases the range of companies and entities which fall within its remit. While the initial focus of the ARGA is likely to be upon the accounting and audit regime of companies, with its new powers and sanctions, the governance reporting in the Report and Accounts will be clearly in its sights.
The ARGA’s ‘ability to act’ will also be reinforced by a simplified board with strengthened oversight, and non-executive members and the chair as public appointments. The Regulator will be accountable to Parliament, with strategic direction from the Government. The proposals provide a very direct route for Parliament and the Government to enact its wishes and desire for action, contrasting with the current convoluted and unresponsive outcomes to ‘calls for progress and change’.
As summarised by one commentator on the changing landscape, “At the heart of effective reform must sit a regulator with teeth, with sufficient powers to do its job properly.”
Companies have a breathing space to show they have the wherewithal to respond and shape the need for better, clearer, more descriptive and innovative reporting to support the investor community. This is before they are ‘forced’ into more prescriptive change and rules designed for them. The requirement has been clearly stated by the outgoing FRC and the challenge is with Boards to respond and demonstrate their ability to create a coherent and strategic narrative about the governance of their own company.
