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FRC publishes Annual Review of Corporate Governance Reporting 2023

FRC publishes Annual Review of Corporate Reporting 2023

    The Financial Reporting Council has published its annual review of corporate governance reporting for 2023 in which it showcases examples of high-quality and insightful reporting by many companies. Equally importantly, it also highlights those areas where it wishes to see improvement.

    As in the previous three years, the review considers the reporting of 100 premium listed companies required under the Listing Rules to follow the UK Corporate Governance Code (Code). The sample of companies reviewed comprised a mixture of FTSE 100, FTSE 250 and Small Cap companies.

    Set out below are the key issues identified by the FRC this year on which reporters should reflect when preparing their next annual report. The review concludes with the FRC's view on good practice in relation to cyber and information technology reporting.

    It is important to remember that the FRC does not have jurisdiction over corporate governance reporting. This was expected to change as part of the government's wider package of audit and corporate governance reforms and, in particular, with the constitution of the FRC's successor body: the Audit, Reporting and Governance Authority. The primary legislation needed to bring this change forward did not appear in the King's Speech earlier this month (see AGC Update, Issue 43). Nevertheless, the governance team at the FRC will continue to raise comments on governance reporting as part of formal corporate reporting reviews on those parts of an annual report where it does have jurisdiction. 

    1.  Governance reporting in general

    The FRC urges all companies to pursue a goal of strong, clear and informative reporting of governance outcomes, and the actions that this drives. Genuine insights, rather than repetition of generic language, are essential for the application of the Code’s Principles and the spirit of ‘comply or explain’. 

    Companies should focus on actual practices rather than policies and procedures to demonstrate that a company is well governed and sustainable, and able to deliver investment, growth and competitiveness. 

    Compliance with the Code – applying the Principles

    The FRC observed that some companies have provided, in their compliance statement, high-level commentary on the application of the Principles under the broad headings of each section of the Code, and then complemented this with signposts to those parts of the annual report which relate to the application of a particular Principle or set of Principles. This approach has the advantage of not adding unnecessarily to the length of the annual report by discussing each Principle separately and in detail, but instead providing a helpful overview with cross-references where appropriate. The FRC encourages companies to use this approach. 

    Good reporting on the application of Principles also provides detail on specific board actions and considerations in the year. 

    Compliance with the Code – complying with the Provisions

    More than 50 per cent of companies departed from one or more provisions of the Code with many being more transparent about the reasons for doing so than in previous years. However, many explanations for departures from the Code still lack for clarity. 

    The FRC found too many examples of unconvincing boilerplate reporting which fails to meet stakeholder expectations. Simply stating the timeline for achieving compliance with a Provision is not enough, companies also need to say why their alternative arrangements delivered benefits to the company and its shareholders. Unexplained departures from the Code were also evident.

    Director pension contribution alignment with the rest of the workforce was the Provision (38) most frequently departed from, with the tenure of the chair (Provision 19) in second place.

    2.  Section 1 - Board leadership and company purpose

    Key messages on reporting against this section of the Code include:


    Good reporting focuses on setting out both the practice and policy underpinning culture along with objectives and progress towards milestones. This includes reporting on what activities helped to achieve a particular outcome. Too often culture-related disclosure in the governance report repeated what can be found in the strategic report or wording from the Code.

    Better reporters included case studies and reduced the length of reporting by the use of hyperlinks or QR Codes. Only a minority of companies discussed progress they had made on their culture agenda, setting out actions and activities following board decisions from the previous year.

    Ultimately, too few companies provided insightful disclosures that address the process, actions and outcomes of their culture assessment and monitoring work. Here the review contains examples of wide-ranging metrics / cultural indicators. Better reporters also included details of 'embedding initiatives'.

    Purpose and values

    While most companies state their purpose, far fewer provided good supporting information underpinning purpose and values, with the purpose statement often limited to what resembles a marketing slogan and with no explanatory notes.

    The better reporters were clear on each element of their purpose explaining, for example, why the company exists, what it does, the market in which it operates, what it is seeking to achieve, and how it will achieve it.

    As regards values, the best reporters went beyond simply listing them and explained what those values mean in practice, how they translate into behaviours and how they have been embedded.

    Shareholder engagement

    The FRC found that reporting remains mostly generic, with limited disclosure of details and feedback received or examples of outcomes, including how engagement has affected decision-making or strategy. The importance of 'effective engagement' is emphasised: this should include a two-stage process where the company is able to receive the views of its shareholders on matters of importance and act upon the feedback where appropriate.

    Companies should be reporting:

    • The frequency of engagement.
    • The topics of engagement.
    • The different methods used to engage with shareholders.
    • The feedback received.
    • The outcome of engagement and if the engagement has led to different decision-making processes.

    Incidence of engagement between shareholders and board committee chairs remains limited. Conversely, the FRC witnessed an increase in the use of 'perception studies' which involve third parties engaging with investors on behalf of a company – while it has no objection to the practice, it reminds companies that it does not absolve board members of their responsibility to engage. 

    Stakeholder engagement

    Whilst considered good, reporting in this area was observed as tending to be formulaic and missing specific examples to demonstrate how a board had considered the interests of stakeholders, as set out in s.172 of the Companies Act 2006. 

    The FRC continues to encourage use of its stakeholder 'feedback cycle' which involves reporting in relation to:

    • Inputs – Who is responsible for engaging and why are they engaging?
    • Outputs – What issues were raised during the engagement?
    • Actions – What actions has the board taken as a result?
    • Impacts – What impact have these actions had on stakeholders and the company?

    Some elements of the cycle were better reported on than others, with a need for further improvement in outcome-based reporting, given that the majority of disclosures in this area appear to be general or boilerplate statements not linked to stakeholder views. 

    Workforce engagement

    The FRC commended the focus it found on workforce engagement with the best reporters showing the beneficial impacts arising when companies broaden their engagement to include culture, purpose and values. 

    Notably, and despite prior FRC commentary, very few companies explained why they consider their workforce engagement mechanisms to be effective. By way of reminder, Provision 5 of the Code states that companies should keep their mechanisms under review so that they remain effective.

    Climate / TCFD reporting

    Climate-related reporting was reviewed for the third year given its link to various elements of the Code, including risk management, stakeholder engagement and s.172 reporting.

    Companies reviewed had taken steps to improve their reporting and strengthen their governance of climate-related issues. The FRC expects these improvements to continue.

    Interestingly, a larger number of companies than last year disclosed only partial compliance with the Task Force on Climate-related Financial Disclosures recommendations but many were commended for their explanations as to why and the timeline for their intended compliance. 

    Particular areas for improvement include in relation to:

    • the disclosure of methodologies to calculate metric data;
    • the clarity of metrics used to track targets; and
    • the disclosures of senior management expertise and knowledge in relation to climate / sustainability matters.

    3.  Sections 2 and 3 – Division of responsibilities / Composition, Succession and Evaluation

    Key messages on reporting against these sections of the Code include:


    Better reporting included disclosure on the progress made on achieving objectives and targets, and improvements made year-on-year.

    Many companies still fail to link their diversity and inclusion policy with company strategy. The FRC will continue to ask companies to define their business strategy and link this to their diversity objectives.

    Board evaluations

    Reporting on actions and outcomes arising out of board evaluations continues to be mixed. Many companies continue to use boilerplate statements such as ‘the board and each of its committees are operating effectively.’ Some companies did, however, accompany these statements with areas of board strengths, which provided some additional insight.

    The FRC also saw it as encouraging that many companies include recommendations to improve effectiveness and areas of focus for the following year. However, there continues to be less insight into the outcomes of committee evaluations despite 'formal and rigorous' annual evaluations of them being part of the relevant Code Provision. Many companies also did not mention the extent to which board composition and overall diversity were considered during evaluation, as intended through the application of Principle L. 

    4.  Section 4 – Audit, Risk and Internal Control

    Key messages on reporting against this section of the Code include:

    Auditor independence

    The FRC expects discussion of non-audit services policies, and particularly any examples given of where an auditor was permitted to provide such services, to set out why the auditor was permitted to do so and why the auditor was considered to be independent despite providing non-audit services. Moreover, information on non-audit services policies should not be provided at the expense of an explanation of independence – including how it was assessed and safeguarded.

    Auditor effectiveness

    The FRC expects discussion of how audit committees assess effectiveness not only to include the process followed in this assessment but also detail on the outcomes of the assessment, how any issues were factored into the audit committee’s conclusions, and what those conclusions were.

    Audit tenders and tenure

    Companies are reminded not only to disclose the date of the last audit tender but also the length of their current auditor's tenure.

    Risk assessment and internal controls

    The FRC believe that there has been little year-on-year improvement in the quality of reporting in this area; some companies report very well but the majority do not, and fail to demonstrate sufficiently that robust systems, governance and oversight are operating effectively. As elsewhere, the FRC wants to see more reporting on actions and not just procedures. 

    Reporting on principal risks should not be static, rather it should demonstrate how risks have changed during the year. Good reporting demonstrates that the board is regularly conducting horizon scanning for emerging risks and that the company has effective procedures to identify and monitor these risks.

    As regards the effectiveness review of risk management and internal controls, the FRC expects boards to define and report on the process adopted, including the requirements, scope and frequency of the review, being clear about the board's involvement. In short, reporting should:

    • Give a full description of the process for reviewing the effectiveness of risk management and internal control systems.
    • Explain the outcome of the review: Are these systems operating effectively? If not, what weaknesses or inefficiencies were identified?
    • If any weaknesses or inefficiencies were identified, explain what actions the board has taken, or will take, to remedy them.

    5.  Section 5 – Remuneration

    Key messages on reporting against this section of the Code include:


    Companies are encouraged to report clearly on remuneration, including how they deliver company strategy, long-term success, and alignment with workforce remuneration.

    Use of remuneration committee discretion

    In addition to setting out clearly how discretion is used within the remuneration committee report, companies should also take into account the last element of Provision 41 and state to what extent discretion has been applied to remuneration outcomes as well as the rationale for doing so.

    Linking performance metrics to strategy

    When communicating performance metrics, reporting needs to describe how these link to a company's strategy. The better reporters explain how their chosen financial and non-financial metrics each link to strategy. 

    Linking remuneration with purpose and values

    Companies should look to provide specific explanations and directly refer to their corporate purpose and values when discussing their executive remuneration arrangements. Most current statements fail to explain how the remuneration framework is designed to align with purpose and values, and what the benefits are.

    Malus and clawback

    Reporters should be clear on when malus and clawback provisions might apply, including the minimum period in which clawback might be used. To help investors and improve transparency, an explanation of how malus and clawback might be enforced should be included.

    Engagement with the workforce on remuneration

    Companies that reported insightfully in this area included examples of the specific remuneration-related topics that remuneration committees discussed with the workforce and provided information on what issues were raised.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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