The UK Financial Reporting Council’s report on Developments in Corporate Governance and Stewardship contains many insights useful to Japan as it implements its new Corporate Governance Code and the Stewardship Code. In particular, pages 17-22 on stewardship and engagement, and the quality of stewardship statements, provide food for thought in the sense that progress for the Stewardship Code seems spotty and slow.
This is the first corporate governance and stewardship monitoring report to be issued under my chairmanship of the FRC. After eight months, my assessment is that while there are still areas that need improvement, there has been much to celebrate.
The UK’s strong governance culture encourages companies to list in London and provides assurance to investors that the information they receive from boards is fair, balanced and understandable.
There has been an increase in compliance with the UK Corporate Governance Code. While this remains encouraging I remind companies who have chosen not to comply that explanations should fully describe and explain their thinking.
The UK is on course to reach Lord Davies’ target of 25 per cent of women directors in the FTSE 100 in 2015 and, after some slow-down, the percentage of female executive directors has started to rise. There have also been improvements in the quality of disclosures by Audit Committees and more companies are now retendering their external audit contracts.
Users of the Code tell us that there is a balance to be found between addressing emerging governance issues, while giving enough time for recent changes to take effect. The 2014 updates to the Code introduced new requirements for risk management and reporting, and amended the remuneration sections – all aimed at encouraging boards to look further ahead and to be more accountable to shareholders. It is important that we give these changes time to bed down before we comment on their success.
The governance of individual companies depends crucially on culture. Unfortunately we still see examples of governance failings. Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole and that requires constant vigilance. This is not an easy task. Our recent guidance on risk management highlighted the
need for boards to think hard about assessing whether the culture practised within the company is in line with what they espouse. Boards should consider what assurance they have around culture. Are performance drivers and values consistent? How can culture be maintained under pressure and through change? Is the culture followed consistently throughout the business? We will be working to promote best practice in these areas during 2015.
The risk management guidance also reinforced the need for boards to be frank about their capabilities to address the threats to the long-term success of the company, which includes threats arising from behaviour in the company.
The Code recommends that boards be a place of constructive challenge. Shareholders should provide a similar challenge. Looking at the UK Stewardship Code, with close to 300 signatories, there is the potential for a critical mass of oversight and engagement. There are signs too, that following the UK Stewardship Code has become best practice, with mandates increasingly referring to stewardship and reports of better proactive engagement by companies and investors over the 2014 AGM season. However, despite these improvements, too many signatories fail to follow-through on their commitment to the Code. Asset managers should not sign-up just to tick a box, but to commit to adopting and reporting against the principles of the UK Stewardship Code with appropriate explanations where needed.
We also hear mixed reports about the role of some proxy advisors. Although these organisations provide a valuable service to investors in analysing company governance and performance and so can support the principles of the UK Stewardship Code, it is essential 2 Developments in Corporate Governance and Stewardship 2014 that their advice takes full account of company circumstances and explanations, and is based on the same level of engagement as is expected of their clients.
More information about our findings and overall assessment is given in the rest of this report.
The FRC would like to thank those organisations which have researched and published governance reports and those that have surveyed their members and collated data on our behalf. This information is important in informing and complementing ongoing discussions we have with investors, companies and other market participants.
In 2015 the FRC will reflect on the issue of company culture and behaviours (including in relation to the European Commission’s Recommendation on the quality of corporate governance reporting); the application of the UK Stewardship Code (and the impact of the Shareholder Rights Directive); and the role of proxy advisors. Further analysis in these areas will help us to build greater confidence in listed companies. We need to reinforce a virtuous circle of long-term, sustainable returns attracting capital which drives further investment and supports economic growth that creates demonstrable value for the real economy. This is a powerful way in which capital markets can safeguard the support of the public, and the UK can maintain its hard-earned reputation for high quality corporate governance and reporting.
SIR WINFRIED BISCHOFF
Chairman, Financial Reporting Council
January 2015 “
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