Existing compliance procedures are not adequately capturing risk.
The Financial Reporting Council (FRC), the UK boardroom regulator, criticized leading British companies for failing to respond to new corporate governance guidelines on board-member remuneration, corporate culture and workforce engagement.
The latest FRC review found that many leading companies opt for “strict compliance” with the code rather than making any meaningful changes. “Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the code,” says FRC CEO Sir Jon Thompson, “and does a disservice to the interests of shareholders and wider stakeholders, including the public.”
The UK’s corporate governance code was updated in 2018 with new guidelines requiring boards to scrutinize corporate culture and determine whether it aligns with strategic goals. It also requires boardrooms to engage with the workforce; to pursue concerns over pay, working conditions, gender equality and harassment; and to report back to shareholders annually. Remuneration committees are likewise required to explain how they block inappropriate executive compensation and report on their engagement with the workforce.
The FRC’s new policy stems from mounting concerns among shareholders and other stakeholders that traditional corporate reporting does not encompass what they consider to be important risks. “Many investors are increasingly seeking nonfinancial measures relating to the workforce,” says Edward Houghton, head of Research at the Chartered Institute of Personnel and Development, the professional body for human resources and people development.
“What is lacking is a holistic approach,” says Maureen Beresford, a member of the FRC’s corporate governance policy team. “It’s seeing governance as a long-term approach for the company rather than just looking at the code and saying, ‘Yes, we have done this.’”
Many companies grapple with defining their purpose and describing an effective culture. The FRC is seeking to find ways to measure corporate culture, says Houghton, to ensure that corporate vision statements embody a clear purpose that goes beyond mere marketing and embraces all stakeholder concerns.
“A more structured approach to reporting on the workforce is needed,” he says. “Stakeholders are keen to access standard measures and comparable data sets. This is important if we’re to improve the quality of reporting.”