FRC governance report calls for ‘greater focus’ on culture and strategy
6 Feb 2020
UK companies are struggling with defining their purpose and “greater focus” is required on sustainability, stakeholder engagement, diversity and the importance of corporate culture, according to a report from Britain’s governance watchdog.
The report, from the Financial Reporting Council (FRC), on performance against the 2016 UK Corporate Governance Code and its revision in 2018, also found that a quarter of FTSE 100 chairs have served more than the recommended nine years.
According to the FRC’s chief executive, Sir Jon Thompson, good examples of high-quality reporting against the codes, were present. The review only looked at early adopters of the 2018 revision. But he argued for improvements across a number of areas including “greater insights” on outcomes for issues such as diversity and climate change.
“Concentrating on achieving box-ticking compliance, at the expense 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 Thompson.
“Where companies depart from the provisions of the code they need to provide compelling explanations for why non-compliance is the right approach for their particular company.”
The FRC said there is “insufficient consideration” of the importance of culture and strategy, or the views of stakeholders. The 2016 version of the governance codes mean companies should be “commenting on culture” and explaining how it is monitored and assessed.
According to the report: “It was disappointing that only a small number of boards disclosed that they already receive reports on culture to aid discussions, especially as the importance of corporate culture was raised by the FRC more than three years ago.” The FRC also found only passing efforts to describe company purpose.
“Too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit. This approach is not acceptable for the 2018 code,” said the report.
“Reporting in these ways suggests that many companies have not fully considered purpose and its importance in relation to culture and strategy, nor have they sufficiently considered the views of stakeholders in their purpose statements.”
The FRC found “limited” reporting on diversity, though those that did a good job “understood” its long-term value.
The FRC also took aim at engagement surveys as a means of gathering insight on employee views. They can help, but “should not be used in isolation”. The report said there was “little analysis” of whether methods for engagement were the “best for the company”, to ensure boards were aware of key issues.
On guidance that chairs should serve no more than nine years, the FRC found that of the FTSE 100 and 250, 74 chairs had been in post longer. The FRC highlighted that 18 chairs had been in place longer than 18 years. “We would expect these companies to set out their rationale for this situation and their proposals for the future composition of their boards,” the report stated.
There were also concerns about succession planning, specifically a lack detail with “many companies focusing on their appointment process… rather than providing information on how they plan for the various types of succession that exist.”
This article first appeared on the website for Board Agenda (www.boardagenda.com).
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Peadar Duffy, Founder Director at SoluxR™- Interesting report here on the FRC's views as to importance of 'purpose' to strategy and culture. Interesting also is its resonance with similar views from Blackrock, Business Roundtable etc. Essentially we are seeing an emerging consensus that a meaningful purpose statement which is value, and values, centric leads to more sustainable (long-term well being for all) performance.