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With a shakeup to the UK Corporate Governance Code looming, Gabriella Demetriou examines the Code’s role, where organisations struggle and how you can get ahead of proposed changes.
Contents
All listed and most large organisations will be familiar with the FRC’s UK Corporate Governance Code, last refreshed in 2018. It's come a long way from its first iteration as the Cadbury Report in 1992. Its purpose, despite its ‘comply or explain’ basis, is a compilation of cherry-picked best governance practices, designed to strengthen accountability and resilience, and create a blueprint to work from and towards. More than this, our Getting smart about governance research proved that governance is integral to an organisation’s ability to create and retain value and build resilience.
But where and why do organisations struggle? And, now that corporate governance is set for an overhaul to make boards more responsible for fraud and other issues, what can you do to prepare?
2022 Corporate Governance Review
Our 2022 Corporate Governance Review will be released in February 2023.
Our Corporate Governance Review 2021 (CGR) research shows that only 44% of FTSE 350 companies currently comply with the 2018 Code, with a 14% drop in compliance from the previous year. It's a predictable result following the 2018 Code refresh. Within this, 70% provide detailed explanations for non-compliance, suggesting they are leaning into the true spirit of ‘comply or explain’.
That said, with just under 50% reporting compliance, where is the struggle? Is it that applying the Code is now sometimes approached as a tick box exercise, with only cursory engagement with the principles? Both the FRC and the government are aware of the patchy engagement with the Code overall, with some areas proving a particular challenge.
For example, our 2021 CGR analysis highlighted the four key areas where companies are struggling to adopt best governance practice. They are culture, internal controls, ESG and stakeholder engagement. This analysis, combined with the government’s BEIS consultation and subsequent responses (BEIS, FRC), should prompt further consideration. This is important, as any area of the Code where adoption or engagement is low could be ripe for review and evolution. Within our 2022 findings, which are due shortly, we hope and expect to see some improvements within these areas and consolidation across other areas of reporting. Historically, change has been incremental rather than monumental; it's expected that there may be more form over substance in reporting.
Moving to resilience
The Code is an excellent, one-of-its-kind source of best practice corporate governance irrespective of its ‘comply or explain’ basis. Year on year, areas of challenging adoption continue to draw our attention, however – not for lack of guidance released by the FRC. The difficulty may lie in perception: adopting a compliance rather than continuous improvement mindset may be holding boards and company secretarial teams back from effectively engaging with all the Code has to offer.
With the FRC’s response paper to BEIS effectively stating that the government's and FRC’s proposed changes will go in the Code upon its next review (earliest 2023), boards and company secretarial teams can look to get ahead. They can do this by reflecting on their approach to engaging with the Code, whether through an internally-led governance review, an independent governance review, or a simple benchmarking activity.
Importantly, our findings on the four areas of challenge in 2021 tie in with many of the current and potential changes to the Code. Putting in the effort and work now can help companies strengthen resilience and effect strong foundations, ready to build upon once changes are fully confirmed.
Corporate governance insights and benchmarking
Carefully considering and reviewing your engagement with the Code can be achieved through well-timed, insight-generating activities. These two approaches can help create a roadmap to being future fit:
Governance review – a detailed, thorough review of as-is governance arrangements aligned to the Code with future changes and best practice in mind when making recommendations
Benchmarking exercise – a detailed benchmark of your reported governance practices aligned to the five areas of the Code; tailored comparative views as to where your governance practices stand against competitors or best practice organisations
The UK Corporate Governance Code is positioned to evolve into a place of prominence, as the new means of supporting organisational resilience. Steps taken now can create strong foundations and ensure you are future-fit ahead of the changes to come.
To discuss strengthening accountability, resilience and governance practices, get in touch with Sarah Bell.
