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The UK Corporate Governance Code is flexible and applies to companies with a premium listing on the London Stock Exchange, regardless of their incorporation location. To comply with the UK Listing Rules, these companies need to apply the Principles of the Code and either comply with Provisions or explain how departing from Provisions is beneficial and best suited to the company.

The Financial Reporting Council (FRC), the governing body that sets the Code, conducted a recent review of the reporting of 100 premium-listed companies. This review of corporate governance reporting showcased some exceptional high-quality reporting as well as some disappointing examples of unconvincing boilerplate reporting that does not serve the purpose.

The Code has five sections, and the report’s observations are provided per each of them – Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession, and Evaluation; Audit, Risk, and Internal Control; and Remuneration. Reporting on Cyber and Information Technology (IT) issues was a part of the review for the first time.

The main findings are summarised below:

Application of the Principles

It was noted that company reports have shown improvements from last year. Yet, the Council suggests moving away from the formulaic “Principle by Principle” approach, which only adds length, not value. Instead, it suggests reporting on the impact of applying Principles on the actions taken by the Board.

Compliance with Provisions

It was noted that companies have clearly stated the Provisions they complied with and the ones they departed from, unlike last year’s reports, which had ambiguous statements.

63 out of 100 companies disclosed departure from at least one Code Provision within their statement.

37 out of 100 companies claimed full compliance; while this is an increase from last year, it is a sharp decline from 2020.

The increase in departures from the Code is witnessed positively, only reaffirming the Council’s proposition of good governance at the core of reporting; hence, if the departures are explained, and the companies continue to apply the Code’s Principles, the Council welcomes it.

Provisions in particular

It was witnessed that Provision 38 (Pension Alignment) was the most deterred, with companies claiming delayed compliance.

Explanation from Code Departures

It was noted that while there was an improvement in reporting, the essence of departure from the Code Provision is not just confirming timelines or boilerplate reporting, which lacks the clarity to convince the reader about the departure. It is warranted that the Code’s Provision be acknowledged, explaining the company policies and framework that deter strict compliance to it and highlighting the steps that will be taken ahead and timelines for compliance.

KNAV’s Opinion

The UK Corporate Governance Code embodies a flexible framework, resembling a hybrid between a rulebook and a guidebook. Consequently, it becomes imperative to recognize and address the potential risks stemming from noncompliance and justify the reason for a different approach.

Compared to using navigation on a device for guidance, the Code functions as a suggestion for the optimal path to corporate governance. Suppose a company opts for an alternative route (Path Y). In that case, it is essential to acknowledge that the recommended Path is X. Furthermore, articulating the rationale behind choosing a different approach is crucial. This involves acknowledging potential risks associated with Path Y and outlining measures (ABC) taken to mitigate these risks while emphasizing that Path X remains the preferred route and the timeline for compliance.

The purpose of the Code and the FRC reviews is to ensure that the investors understand what they read; they are assured of the Provisions that have been fully complied with and those that have been departed from. The goal of financial reporting is to present an accurate financial picture to investors. The Financial Reporting Council (FRC) actively conducts reviews to promote more robust reporting, ensuring investors can trust the information they receive.