Viability, risk, diversity come under FRC spotlight

Recommendations for improved corporate governance were a part of the UK FRC’s Annual Review of the UK Corporate Governance Code, published Thursday. The FRC looked at the quality of companies’ reporting against the 2016 UK Corporate Governance Code and also made comments on those FTSE-100 companies that were “early adopters” of the 2018 UK Corporate Governance Code, which applies to annual reports published this year.

The FRC’s chief executive, Sir Jon Thompson, recognised the examples of high‑quality reporting from companies already adopting the 2018 code. However, he said that looking ahead, “we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change”.

Companies should take a two-stage approach to reporting on the resilience of their business model in the viability statement, the FRC said. They should first consider and report on their longer-term prospects “taking into account the company’s current position and principal risks”, and then state whether they have a “reasonable expectation that the company will be able to continue in operation and meet its liabilities” over the viability assessment period.

The FRC highlighted other areas including:

Risk. There was evidence that companies are linking risks, such as Brexit and cyberattacks, to their strategy, but they “should provide additional explanations of the impact of all risks being realised on future strategy”, the regulator said.

Diversity. “We expect to see an increase in more detailed commentary on all aspects of diversity in future disclosures,” the FRC noted. Almost all the company annual reports the regulator reviewed said they had a diversity and inclusion (D&I) policy. However, the FRC found “limited” reporting of diversity beyond gender.

Culture. The FRC looked forward to seeing more details of companies’ work on assessing and monitoring culture. Very few company reports cited more than three metrics used to monitor and assess culture, and there was little evidence that internal audit is used to assess or monitor it. Further, the regulator said annual reports should demonstrate that companies’ codes of conduct “articulate the values the company [wishes] to foster in both leaders and employees, and in doing so [define] appropriate behaviours”.

The full report is on the FRC website.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.