On 14 December 2011, the Financial Reporting Council (FRC) published a report on the impact and implementation of the UK Corporate Governance Code for listed companies and the Stewardship Code for institutional investors. The UK Corporate Governance Code (formerly the Combined Code) was updated in June 2010 and the Stewardship Code was published in July 2010.

UK Corporate Governance Code

The FRC indicates that implementation of the UK Corporate Governance Code by listed companies has generally been good. For example, 80% of FTSE 350 companies put all their directors up for re-election in 2011, more companies are bringing in external advisers to assist with the evaluation of the board’s effectiveness, and many company chairmen and committee chairs now make a personal statement in the annual report. The FRC also indicates that boards are now making considerable efforts to understand and oversee the main risks facing the business, as required by the Code.

The report indicates that the majority of companies only deviate from the Code in respect of one or two of its 48 provisions. However, while some companies clearly set out their reasons for departing from the Code, others do not refer to the specific circumstances of the company or give no explanation at all. The FRC is holding discussions with companies and investors to identify the type of information that should be provided if explanations are to be useful to shareholders. The FRC also observes that, while overall corporate reporting is improving, there are still too many examples of generic and boiler-plate reporting and certain areas could be improved. The FRC indicates that reporting by audit committees is often unenlightening.

Stewardship Code

The FRC indicates that the response to the implementation of the Stewardship Code has been positive. Over 230 asset managers, asset owners and service providers have signed up to the Stewardship Code. However, the FRC considers that the quality of reporting against the Stewardship Code is variable and it encourages all investors to apply the same standards to their own reporting that they expect of companies. The report comments on the nature and extent of company – shareholder engagement and the lack of any discernible impact by the new corporate governance regime on voting patterns to date.

Future developments

The report contains a helpful summary of various ongoing and proposed reviews of aspects of the corporate governance framework, both at UK and European level.

The FRC proposes to amend the UK Corporate Governance Code to require companies to disclose their policy on boardroom diversity and to report annually on how it is being implemented. The FRC expects to launch a consultation on certain changes to the UK Corporate Governance Code in March or April 2012. The consultation will cover the remit of, and reporting by, the audit committee and the recommendation that the external audit should be put out to tender at least every ten years. The FRC may also consult on the “going concern” provision in the UK Corporate Governance Code, depending on the outcome of Lord Sharman’s ongoing inquiry. At the same time, the FRC will consult on limited changes to the Stewardship Code. It is envisaged that the resulting changes will take effect from 1 October 2012.

View the Developments in Corporate Governance 2011 Report (32 page pdf).

View our June 2010 E-Bulletin article: FRC publishes the new UK Corporate Governance Code (webpage).

View our October 2010 E-Bulletin article: FRC publishes UK Stewardship Code (webpage).

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