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FTSE 350 Sees Decline in Corporate Governance Compliance

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FTSE 350 Sees Decline in Corporate Governance Compliance.jpgFull compliance in corporate governance for FTSE 350 companies has decreased from 61% to 57%, according to Grant Thornton’s Corporate Governance Review and Trends 2015 Report.

The 2015 figures also show a slight decrease in the number of FTSE 350 companies who complied with all but one or two of the UK Corporate Governance Code provisions; 90% compared to last year’s 93.5%.

Purpose Of The Report

The Financial Reporting Council (FRC) have welcomed the report and acknowledged that it assists the FRC in tracking the implementation of the Code and related developments.

The key areas of focus in 2015 were company culture, the ‘comply or explain’ principle, the Stewardship Code, proxy advisers and succession planning. 

Related: Companies Failing To “Comply Or Explain” Properly – FRC Report

Strategic Reporting

The Report suggests that whilst 96% of the FTSE 350 produced a strategic report, the quality of reporting appears to vary as this has not necessarily led to more concise reporting, as was intended with the introduction of strategic reporting requirements in 2014 (the average length of an annual report has increased to 158 pages in 2015 from 155 pages in 2014).

However, there have been improvements in the quality of commentary regarding in-year performance and operating environment, with 80% of companies now giving informative insight; an increase of 3% from 2014. While this demonstrates progress, companies were continuing to have difficulties in articulating their forward looking perspective, with only 41% providing a “good” or “detailed” explanation.

Related: Update To The UK Corporate Governance Code 2014

Company Culture

The Report also analysed the quality and profile of reporting on corporate culture and values. According to the Report, 20% of FTSE 350 chairmen give “culture the prominence it deserves and provide good insight” into corporate cultures. However, only half of these use their primary statement to highlight its importance. The majority, however, do not and their commentaries are disjointed, giving the impression that culture and values are not embedded within the business.

Related: The Core Principles Of Good Corporate Governance

Comply Or Explain

Despite the decrease from 61% to 57% in full compliance, there has been an increase in ‘good quality explanations’; up 59.3% in 2014 to 69.4% in 2015.

Additionally, there were also a higher number of new entrants to the FTSE 350 in 2015 which has contributed to the small decrease in full compliance.

Of the 23 new entrants to the FTSE 350, two joined the FTSE 100, with the remainder forming part of the Mid 250. 21 new entrants did not fully comply with the Code with just one new entrant in each of the FTSE 100 and Mid 250 meeting full compliance. The Report suggests that “perhaps the market should place more pressure on sponsors to ensure full compliance before such companies come to market seeking fresh capital?”

Overview

Overall, the Report suggests that whilst findings have been positive in general, there is still room of improvement and that “to a large degree the market is still digesting last year’s developments, and companies are getting used to making robust explanations and disclosures rather than seeking to fully comply”.

Sir Winfried Bischoff, Chairman of the Financial Reporting Council, also welcomed the reports and highlighted the FRC’s role in promoting good governance:

“The FRC’s mission remains to promote high quality corporate governance and reporting to foster investment. We seek to build justified confidence in the UK framework for corporate governance and reporting, and to promote a principles-based approach in EU and international fora.”.

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