Corporate governance improves slowly in the UK, research shows

About half of the UK’s largest public companies failed to comply with the country’s Corporate Governance Code, and half of those are not in compliance for the second consecutive year, according to new research.

Grant Thornton’s annual Corporate Governance Review of FTSE 350 organisations shows that more are providing explanations for a lack of compliance and that 44% of companies said they would comply next year.

The UK Corporate Governance Code, put out by the Financial Reporting Council, sets out best practices for board leadership, accountability and shareholder relations.

Grant Thornton’s review of 296 annual reports revealed signs that companies are taking governance more seriously. Nearly one quarter (23%) of chairmen are using their primary statement to provide insight into their board’s governance priorities, up from 10% last year. After 57% of chairmen last year made no mention of governance in their primary statements, 42% made no mention of it this year.

“Enlightened chairmen are starting to convey the importance of values, culture and ethics as cornerstones of business integrity and good governance practice,” Simon Lowe, the chairman of the Grant Thornton Governance Institute, said in a news release.

Still, 49% of companies failed to comply with the Corporate Governance Code, compared with 51% last year. Of the 144 companies that did not comply in the most recent research, 72% provided details on why, up from 68.7% last year. Seventy-three companies have not complied in consecutive years, and two-thirds of those made no change to their explanations.

If each of the 44% who vowed compliance next year did so, it would “mark a turning point,” Lowe said in the release.

“That said, there are pockets of explanation which suggest either a weariness or lack of commitment to the concept of transparency,” he said. “With the regulators' focus turning to the quality of explanations, it is no longer enough to provide the same detailed explanation year after year. And even those who already shun the boilerplate approach with quality explanations cannot afford to stand still.”

The report also showed that:

• Explanation of a company’s gender diversity policy for board members is becoming increasingly important. While 72.1% of companies had no explanation in 2011, 78.4% had come up with at least some details in 2012.

• Explanation of board members’ annual performance is also growing: 51.7% have detailed explanations of how board members are evaluated, compared with 36.6% last year.

• Directors are paid bonuses through a combination of cash and shares at 42.2% of companies, and 21% pay cash only. The form of payment to board members was not stated by 35.1% of companies.

Related CGMA Magazine content:

“Private Companies Turn to Corporate Governance to Protect Slim Margins”: In the US, voluntary compliance with Sarbanes-Oxley provided benefits for private companies.

“How to Make a Corporate Board More Effective”: Corporate governance is like steering a race car: It requires skill, good information and a certain mindset, or the company could veer off course. A CGMA report helps with best practices for corporate boards.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.