"It would seem that companies are continuing to implement tailored governance strategies; however, with the FRC reporting that explanations are weak, the question of whether the spirit of “comply or explain” is being embraced is yet to be seen. "
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The prospect of growing requirements created a cumbersome task for preparers, which led to a concerning trend in boilerplate disclosures across the board. Now that the dust has settled and we have a clear view of the disclosures at play, it’s important to consider how to best address them in upcoming reporting.
In this article, we delve into how companies should approach fluctuating guidance on governance reporting, and we identify the three main areas to improve governance reporting.
Comply or else?
Meaningful governance should represent the company and its place in the market. It should be well articulated with robust narrative. This view is echoed by the Financial Reporting Council (FRC) and is a clear focus of their updated Corporate Governance Code due to be published in late January 2024.
The “comply or explain” function of the provisions gives room for companies to embrace the spirit of the Code and ensure that all reporting against the Code should be in the context of the circumstances of the company and therefore be different and tailored. However, in the past research has shown that proxy advisors and ESG ratings agencies have potentially been slow to adapt to this idea that “one size does not fit all”. A number of these agencies continue to take a box-ticking approach to reviewing companies’ governance compliance against the Code, which can leave the sense of “comply or else”.
Despite my potentially cynical concept of “comply or else”, evidence shows that over 50% of companies departed from one or more provisions of the code in 2022/23. It would seem that companies are continuing to implement tailored governance strategies; however, with the FRC reporting that explanations are weak, the question of whether the spirit of “comply or explain” is being embraced is yet to be seen.
In their recent governance review, the FRC states:
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’, Corporate governance disclosures are an opportunity to build trust and understanding, and demonstrate why the UK is an attractive investment market, rather than being a compliance exercise.
One of the benefits of using this flexibility in the Code means companies can avoid being repetitive and boilerplate.
To successfully use a tailored governance strategy, companies need to communicate why departures from the Code are well thought-out and ensure effective governance arrangements and why this delivers benefits to stakeholders. It’s important to provide robust narrative about how companies monitor and review governance outcomes, such as activities taken during the year along with their results or decisions made. Intuitive narrative will help build trust with investors.
Box-ticking without being boilerplate
As we look at governance reporting in the year ahead and eagerly await the updated UK Corporate Governance Code, we encourage companies to look beyond simply box-ticking against new requirements. Box-ticking isn’t enough. Building a well-governed and sustainable company requires fostering the right behaviours and culture through concrete practices. Companies should focus on reporting actual practices rather than policies and procedures.
Here are three key areas to improve narrative in corporate governance:
Creating a meaningful corporate governance narrative begins with a focus on culture. Companies should ensure their culture is aligned with purpose, values and strategy. As well as this, companies should consider the following:
Culture is predominantly referred to by Chairs in their letters; however, we suggest including a dedicated section on culture in the governance section to demonstrate insight. Also, while CEOs play a pivotal role, non-executive directors (NEDs) are increasingly involved in reviewing and managing culture. As well as including content on how NEDs assess and monitor culture-related activities (Provision 2 of the Code), consider going above and beyond by detailing NEDs’ involvement in actively creating and promoting the desired culture across the organisation.
Consider establishing a dedicated board-level committee or task force with a culture remit. Alternatively, incorporate culture-related responsibilities into existing committees, such as a “Remuneration and People Committee”.
Few companies discuss progress made in their culture agenda. It is worth going beyond listing out values and explaining what these mean in practice, how they translate into behaviours and how they have been embedded. Highlight actions and activities resulting from board decisions in the previous year. This narrative could be presented as case studies that showcase progress made on the culture agenda.
A key role of the board is to “monitor culture” so it is key for company secretaries to develop dashboards with KPIs and tangible targets. This showcases how the company’s desired culture can be maintained and improved.
2. Diversity reporting
The Corporate Governance Code Consultation removed the need for companies to link diversity and inclusion to company strategy, as this became a daunting task for companies and uptake was low. Instead of linking to strategy, consider including a diversity strategy that demonstrates not only your diversity ambitions but clearly explains how diversity will be bought to the forefront of board focus. For example, we have seen companies appointing an executive committee sponsor, such as a chief culture and people officer, who can steer the strategic focus towards having a diverse culture.
The most recent Parker Review will be expecting companies to report on targets for ethnic diversity in senior management in 2024. Companies will be expected to provide clear diversity targets and report on their progress in annual reports from 2024 onwards. To be best in class, consider including management development plans to improve the talent pipeline in the workforce as a whole. To help set the right targets, consider a range of relevant data points based on the following: the most recent census data on ethnic diversity in the regions and countries in which their senior management is located; the ethnic diversity of the company’s sector; current senior management ethnic diversity; the ethnic diversity of the talent pipeline or wider market; and any other relevant matters. To reiterate the importance of having a clear narrative, if you haven’t met your target, it is important to be clear on why this is the case and whether there are any plans in place to achieve this in the future.
3. Audit reporting
Find out how to improve your audit disclosures in our article posted as part of our “Ahead of the curve” series post on the topic.
In conclusion, every company is unique, and their approach to governance reporting should reflect this. Comply or explain should be utilised effectively to allow companies to tailor their governance reporting to their particular business approach and the market they operate in. This will help to avoid the growing cases of boilerplate governance reports which have been created as a response to growing regulations and requirements.
Governance reporting is ever-changing, and this allows companies to innovate the way they report against governance. We are excited to see developments in the core areas of diversity, culture and audit reporting in 2024.
Design Portfolio holds governance workshops with our clients that look to improve the accessibility, transparency and creativity of governance reporting, helping communicate to stakeholders in a unique way. If you would like us to review your governance section, feel free to get in touch.