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Compliance gathers pace but threatens the very principles of UK governance

The 13th annual Grant Thornton Corporate Governance Review [ 4002 kb ] reveals that 61.2% (2013: 57%) of FTSE 350 companies comply in full with the UK Corporate Governance Code but raises the concern that this could be undermining the hard fought for principles-based code. 

The trend for accountability and transparency is gathering pace, with chairmen from 93% (2013:70%) of remuneration committees and 56% (2013:44%) of audit committees now delivering a personal introduction to their report, as recommended by the Code. 

However, nomination committees are way off the pace with only 35% of chairmen holding themselves out to be accountable, an increase of just 13%. And this low profile approach is apparent in practice with almost one in five nomination committees meeting once or not at all during the year. 

Most FTSE 350 companies now undertake a triennial, externally facilitated board review, but just 44% of companies give a transparent explanation of how they analyse board performance and looking to the future, only 25% give helpful information about how they will address the findings. 

Meanwhile, the hope that the new Strategic Report would lead to clearer, more understandable information has yet to be fulfilled. Annual reports grew by 11 pages on average this year. At 154 pages this is a rise of 20% over the last 4 years. And while 77% of companies are comfortable explaining the past, when it comes to looking to the future less than half (43%) gave any real insight and only14% of companies met all the Companies Act requirements. 

Commenting on the review, Simon Lowe, Chairman of the Grant Thornton Governance Institute, said: "While it's encouraging to see companies appearing to take governance seriously, the dramatic increase in levels of compliance over the last few years hints that companies may be under pressure from external parties (eg proxy advisors) to comply in full rather than doing what is right for the company. There is a risk that this sees a move away from our hard fought for principles based system to a more prescriptive one - rather ironic when you consider that the European Commission has finally come out in support of principles." 

The research also found that while basic salaries remained much the same, average executive take home over and above base pay has increased dramatically and now represents 319% of base salary (2013:184%). The majority of this increase relates to performance related pay - the greater part of that being options. This suggests that investor pressure to align executive reward to share performance is now being reflected in practice.

Lowe continues: "What really matters is how stretching the performance criteria are, but at least the direction of travel is right. The one area that has yet to have effect in practice is the new clawback requirement - 75% of companies have implemented it, but as of yet, no one has exercised it." 

For a copy of the report, please follow this link [ 4002 kb ].