Governance

Findings from our 2017 Corporate Governance Review

New analysis from leading business and financial adviser Grant Thornton UK LLP, finds that although compliance with the UK Corporate Governance Code has increased, governance and reporting remains patchy. Key areas – such as longer-term viability statements, internal control reporting and gender diversity, see little improvement and investor engagement continues to decline, particularly for the smaller companies.

The firm’s 16th Corporate Governance Review, undertaken by its Governance Institute, provides the only comprehensive analysis of the annual reports of the companies in the FTSE 350. This year, it finds that 66% of companies declared full compliance; a new record and increase of 4 percentage points from last year.

Surprisingly, given the recent focus on investor engagement, the number of companies providing detailed accounts of their engagement with shareholders fell for the third year. Only 33% of the FTSE 350 provide informative insights, down from 64% in 2014. Moreover, only 12.5% of the FTSE 350 report that the Remuneration Chair held face-to-face meetings with shareholders regarding executive remuneration.  This drop off is more marked among the FTSE 250 where direct engagement is clearly much more of a challenge. Only 22% of the FTSE 250 give helpful insight into engagement, down from 68% three years ago.

Further improvements also remain to be made when it comes to boardroom diversity. While 26% of FTSE 100 board roles are filled by women, 38 FTSE 100 companies have less than 25% female representation on their boards, and the numbers are stagnating in the FTSE 250. The picture is worse when it comes to executive and chair roles: 77% of the FTSE 100 and 85% of the FTSE 250 still do not have a woman in an executive role.

Perhaps unsurprisingly given the increased political and media scrutiny on corporate culture, the research finds significant improvements in culture-related reporting. 39% of companies now provide a strong overview of the culture of their organisation, up from 20% last year. However, the number of CEOs making personal reference to culture in their opening statements remains low, at only 29%. Given the FRC’s recent conclusion that the CEO is key for setting and embedding a company’s culture, these low levels of engagement remain disappointing.

Analysis of companies’ strategic reports also reveals other areas where companies can look to improve. For example:

  • Only 62% of FTSE 350 companies fully comply with all strategic report requirements, despite this being a legal requirement
  • 30% of companies fail to adequately report the gender split of their workforce, despite the recent focus on this in the light of the gender pay reporting requirement
  • Despite recent concerns around cyber risk and technology, 27% of the FTSE 350 and 47% of financial industry companies do not identify technology as a key threat to their business. Further, while technology skills are increasingly being brought onto the board (45% up from 39%) to manage this growing risk, Financial services, Healthcare and Consumer goods sectors look particularly exposed, with less than 30% of those who recognise they face significant technology risk having relevant skills on the board.
  • 80% of companies, the highest ever level, now provide good or detailed disclosures around risk management, but only 22% give descriptions on internal controls that deliver real reassurance to the investor.

Simon Lowe, Partner and Chair of the Governance Institute at Grant Thornton UK LLP, commented: “Corporate scandals and escalating executive pay have increasingly eroded trust in business in recent years and consequently, governance standards have elevated in topicality in boardrooms, media, Whitehall and with the general public. A vibrant economy is underpinned by trust in its key markets; thus it’s more important than ever for businesses to continue to improve their corporate governance. This year’s Corporate Governance Review shows some encouraging signs of progress, and it is positive to see more companies than ever before fully complying with the Code.

“The Code has been in play for 25 years. Over the 16 years of our review we have seen huge strides in governance practice and yet frauds, miss-statements and failures in governance still continue to arise.  No code can be a panacea but with a new slimmed down version of the Code to be published next year, and the prospect of a code for private companies, now may be the time that the regulator needs to take a more hands-on approach in encouraging companies to embrace its principles. If the UK economy is to continue to thrive post-Brexit, then companies need to ensure that they are going beyond the bare minimum when it comes to complying with governance requirements, as failure to do so puts them at risk of facing the ire of both the Government and the wider public.”

Download the full report and watch our video here.