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The UK boardroom regulator has criticised listed companies for only “paying lip service” to sweeping changes to Britain’s corporate governance guidelines that came into effect last year.
The Financial Reporting Council, which sets the UK corporate governance code, said a review had found that many large listed companies prioritised “strict compliance” while failing to improve corporate culture, diversity or consider the views of shareholders or the public.
“Concentrating on achieving box-ticking compliance, at the expensive of effective governance and reporting, is paying lip service to the spirit of the code and does a disservice to the interests of shareholders and wider stakeholders, including the public,” said Jon Thompson, FRC chief executive.
The watchdog’s analysis concluded many companies were failing to implement a “clear purpose” or effective corporate culture, instead substituting “slogans or marketing lines”. The FRC also said there was “insufficient consideration” of the importance of culture and strategy in the context of ensuring good corporate governance, and “limited” reporting on diversity at many businesses.
Corporate scandals such as the collapse of outsourcing giant Carillion and runaway executive pay have heaped pressure on the FRC to improve boardroom culture.
It revamped the UK’s 25-year-old corporate governance code in 2018, introducing guidelines for boards to engage with workforces, investigate concerns over conditions, pay or harassment, and scrutinise corporate culture. The FRC also urged boards to pressure management to take action — to be detailed in annual reports — when it finds culture to be in tension with the company’s stated strategy. While the code is not mandatory, companies must explain their actions to shareholders if they do not comply with it.
The new code put pressure on the longstanding chairs of more than 60 listed companies who have held their role for longer than nine years. The FRC set a “comply or explain” provision for any chairman who goes beyond that time limit. However its latest analysis of the code said explanations from companies that did not comply were “particularly poor”.
The code also set new requirements on remuneration committees, including that they must report on their use of powers to block executive bonuses or pay awards, and report on their engagement with the workforce. Boardroom pay policies were thrust back into the spotlight following the failure of travel group Thomas Cook in September. The FRC said “very few” committees had so far detailed their discussions with workers, but added that a “clear majority” had explained the “exact circumstances in which they would exercise discretion” over excessive payouts.
The FRC urged companies to put greater focus on the outcomes of implementing the code in 2020, “in particular on the board’s effectiveness and decision-making, and how this has led to sustainable benefits for shareholders and wider stakeholders”, according to its review.
“Continued corporate failures also raise concerns around board effectiveness in considering and reporting on risks to their long-term sustainability,” it said.
The Chartered Institute of Internal Auditors, which represents 10,000 internal auditors in the UK and Ireland, has added to pressure on companies to improve corporate governance. On Thursday, the institute published its first code of practice for UK companies that made 38 recommendations, including unrestricted access for internal audit functions, a direct line to the chief executive, and the employment of chief internal auditors in every business. Internal auditors monitor a company’s risk management, governance and internal financial controls.
Brendan Nelson, chair of BP’s audit committee and a member of the institute’s group that designed the code, said: “High-profile corporate collapses linked to governance deficiencies have led to a wide-ranging review of the audit and corporate governance framework. Strong, effective and well-resourced internal audit functions have a central role to play in supporting boards to better manage and mitigate the risks they face.”