FRC annual review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its Annual Review of the UK Corporate Governance Code. The report discusses the quality of reporting against the UK Corporate Governance Code in 2021 and the FRC’s expectations for companies reporting in 2022.

The FRC notes that reporting has improved overall since last year (see our blog post on last year’s annual review here), in particular where companies have been reporting on environmental and social issues.

Other key messages from the report include:

• Compliance with the Code – Further to last year’s report, which raised concerns about companies reporting, but not demonstrating, full compliance with the Code, the FRC found an increase in declarations of non-compliance this year. The report reiterates that companies should be clear about any departures from the provisions of the Code and give a full explanation for any deviation (see our blog post on the FRC’s report on improving ‘comply or explain’ reporting here).
• Focus on impact and outcomes of engagement – The report welcomes improved reporting on stakeholder engagement and now encourages companies to focus on the outcomes of this engagement. The report also offers specific guidance on how to improve reporting around suppliers, communities and modern slavery.
• Effectiveness of risk management and internal control systems – The report notes that it is not sufficient for companies to confirm in the annual report that the board or audit committee has reviewed the effectiveness of the company’s risk management and internal control systems. Instead, the report should set out a detailed description of the review process and identify any actions that will be taken as a result.
• Diversity and succession planning – The FRC remains concerned about inadequate disclosures around succession planning. Many disclosures are focused on process, rather than demonstrating coherence between the company's succession plans, diversity and inclusion policies, and strategy.
• Remuneration – Companies should explain how their remuneration arrangements support the company’s strategic objectives and promote its long-term sustainable success. Reporting should also demonstrate how remuneration aligns with the company’s purpose and values by referring to specific performance measures which incentivise executives in these areas. The report also provides specific guidance on workforce engagement.