The Financial Reporting Council have recently issued their Corporate Governance Annual Review of financial statement disclosures by the top 100 premium listed companies on the London Stock Exchange which are required to adhere to the UK Code of Corporate Governance (“Code”). The Review provides an informative guide on how companies in scope have performed against the Code and identifies themes that may need further consideration by Boards to adhere to the Code.
The aim of the Code is to promote better behaviours around the board room and in the company’s reporting and provides the Board help in their governance journey as the company changes in size, nature and strategy.
The Code has 5 main Principles which must be followed with various Provisions which provide guidance to premium listed companies on how to apply the Principles in their Annual Report and Financial statements disclosures.
The Code has a “Comply or Explain” regime in relation to the Provisions and companies are expected to abide by the Provisions or provide an acceptable explanation to demonstrate that effective governance has been maintained in cases were there is a deviation.
The following are highlights of the key findings in this year’s Annual Review that may need further consideration by Boards:
1) Board Leadership and Company Purpose
a) Boards need to better articulate how the company’s purpose is linked to its strategy and objectives.
b) Improvements need to be made as to how directors have engaged with shareholders.
c) Disclosures did not link outcomes from discussions with stakeholders to actions being taken.
d) There was a lack of disclosures on sustainability and the transition plan to get to net zero and how strategy is being adjusted
2) Division of Responsibilities
a) 60-70% of boards state, “the Board is working effectively”. This is not sufficient and does not explain the Board’s action plan on how they are effective in directing the company.
3) Composition, Succession and Evaluation
a) Disclosures need to be better at linking diversity to strategy of the company and how effective the company’s D, E&I policy has been.
4) Audit, Risk and Internal Controls
a) Too many risks are being disclosed rather than a focus on the important ones.
b) Horizon scanning/emerging risks need to be better explained and how any emerging risks could change in characteristics to become embedded ones.
c) Insufficient reporting on the outcomes of the internal audit/board review of the risks and how effective they have been.
5) Cyber and Information Technology
a) Insufficient information on the opportunities and importance of cyber security to the business
b) The use of Artificial Intelligence (“AI”) in company activities was not mentioned nor how the Board were approaching/overseeing it.
c) Insufficient reference to the governance processes around AI.
Considerations
In response, given the gravity of the findings and their impact on overall governance of companies, Boards could consider the following:
- The Principles of the Code should be considered at the start of the financial year rather than the Board using the provisions as an end of year checklist. Engage with your Company Secretary or an independent governance specialist who can assist with a framework on how to achieve compliance.
- The Board’s evidence in applying the Principles of the Code is a live document and should be brought to life in the Annual Report as a way of demonstrating to stakeholders that they are in the driving seat.
- Be brave! Don’t follow what others are doing as every company is different and no two years are the same. The Board should document what has changed, what new issues it has encountered and how they have been dealt with.
- Risk assessment is dynamic and should be a continuous process. Companies should focus on linking their key risks to objectives and strategy and keep an eye on the development of emerging risks.
- Be clear, concise, and uncomplicated. Keep in mind the diverse set of stakeholders that may read the Annual Report.
- Use links in the Annual Report to reference policies on the company’s website. This gives the Board an opportunity to showcase further content to the reader for a better understanding of the company’s activities.
- Do not just repeat the Principles or Provisions in the Code. Focus on the practices in the company that contribute to good governance and proactive positive behaviours.
If you need further guidance on reviewing your compliance with the Code, board performance reviews, internal audit, liquidations, business restructuring or regulatory compliance advisory services, then please send your enquiry to advisory@bdo.gg or email your usual contact at BDO Guernsey.