FRC publishes Annual Review of Corporate Governance Reporting 2024

The Financial Reporting Council has published its Annual Review of Corporate Governance Reporting 2024. This follows its Annual Review of Corporate Reporting which was published in September 2024 (see AGC Update – Issue 56, Item 4). This latest review is based on the annual reports of 100 randomly selected companies which follow the UK Corporate Governance Code. As regards risk management reporting, which is an area of particular focus this year, the review considered 130 annual reports. 

The principal purpose of the review is to showcase examples of good reporting and explore areas for improvement as companies prepare to implement and report against the 2024 UK Corporate Governance Code. By way of reminder, the majority of the 2024 Code is applicable for financial years beginning on or after 1 January 2025, with the exception of reporting against Provision 29 on the effectiveness of risk management and internal controls which will apply to financial periods beginning a year later. On that basis, the review marks the penultimate assessment of corporate governance reporting against the 2018 iteration of the Code. 

Key findings from the Review

General

Overall, the FRC notes that reporting quality remains strong, but there is still a need for more concise, outcomes-focused disclosure. Reporting on risk management and internal controls could be enhanced considerably.

Code compliance

Fewer companies disclosed non-compliance with the Code's requirements than last year with the FRC noting greater compliance with Provision 38 (alignment of executive pension contributions with the workforce) which is perhaps unsurprising given that the Investment Association's deadline for ensuring alignment has now passed. 

While there was an increase in compliance with Provision 19 (which expects that the Chair should not be in place for more than nine years), there was a decrease in non-compliance with other Provisions, including Provision 9, specifically its expectation that the Chair should be independent on appointment. Increased levels of compliance were also in evidence in relation to provisions relating to the composition of the board, and audit and remuneration committees. 

There is no single approach for how companies should report their compliance with the Code. However, good reporting helps a reader to understand how the company has applied the Principles and determine whether it has complied with all the Provisions of the Code. If the company has not fully complied, reporting should inform readers which Provision the company has not complied with, and where to find the explanation for this. 

The FRC reminds companies that explanations of departures from the Code should be clear and provide sufficient detail. Explanations should be provided even if the company has 'rectified' non-compliance by the end of the reporting period. 

Board leadership and company purpose

Reporting on purpose was limited. Better reporters explained each element of their purpose and provided supporting narrative, at times even demonstrating direct links to the strategy and KPIs.

Better practice in values disclosure demonstrated not only listing the values but also ensuring they are company-specific, explained and supported by a disclosure of matching behaviours. 

The review also looked at the issue of 'over-boarding' and was pleased to note good reporting in this area with companies generally setting out clearly the other commitments of their board members. That said, the FRC encourages the disclosure of external board committee appointments given the additional responsibilities that come with such a role.

Corporate culture

The FRC would like to see more thorough reporting and better signposting concerning corporate culture and greater transparency and rigour in reporting on culture assessment and monitoring. 

Disclosure in governance reports around how boards are promoting the desired culture is generally very light. More thorough reporting in this area, and better signposting in the strategic report, where most of culture reporting is usually placed, is urged.

While reporting on culture assessment and monitoring continues to increase, this year more companies opted for disclosure of policies and practices, rather than disclosure of board actions taken during the year. The FRC encourage more transparency and rigour in reporting in this area and the extension of culture reporting beyond the workforce.

Currently, the issue of culture embedding appears to be primarily described in the context of health and safety and ethics and compliance, with a few companies reporting on it through the lens of corporate values and behaviours. Approximately 20 per cent disclosed a clear set of culture metrics and targets; while 28 per cent reported on culture assurance which was mostly undertaken by internal audit functions or conducted by a third party.

Shareholder and stakeholder engagement

Explaining the outcome of engagement activities with shareholders adds meaning and purpose to reporting, although the FRC appreciate that outcomes can take time to materialise.

Whilst the extent of reporting on engagement with stakeholders was high, the FRC believes that it is often unclear how the board, as distinct from senior management or other employees, undertakes that engagement. 

The FRC acknowledge that engagement does not always require the board to take action but where it is taken, good practice is to explain it in the annual report.

Workforce engagement

The most popular form of workforce engagement remains a designated non-executive director, while 20 per cent used an alternative method to those suggested by the Code. The FRC reminds companies that where an alternative method is adopted, the Code expects an explanation of how it is effective to be included in the annual report.

Division of responsibilities

Companies are encouraged to disclose information about the time commitments of their directors. 

Audit and audit committees

The FRC continue to encourage the early adoption of the Audit Committees and the External Audit: Minimum Standard and almost half of the companies surveyed referred to it in their reporting. By way of reminder, the Minimum Standard has been incorporated in the 2024 Code and is therefore voluntary at present. 

The FRC found that the quality and clarity of the disclosures by audit committees of Audit Quality Review inspection results could be improved. 

Principals risks

As regards risk, good reporting on principal risks is not static but shows how risks have changed during the year, and over years. It is for boards to decide whether to review the risk management and internal control systems more frequently than annually. 

With cyber security incidents on the rise globally, the FRC are pleased to see that almost 90 per cent of companies treat cyber security as a principal risk.

It is important for boards to have a clear view of the responsible development and use of AI within the company and the governance around it.

Viability

Viability statement disclosures afford considerable room for improvement. By clearly outlining the rationale for the viability assessment period and providing longer-term information where possible, companies will offer valuable insights to investors. Additionally, including sufficient qualitative and quantitative information is crucial to enable readers to fully understand the assessment.

Internal controls and effectiveness

The FRC state that it is up to boards to determine whether they review the risk management and internal control systems more frequently than once a year. The aim of the review should be to identify strengths, gaps, deficiencies and areas for improvement, and be followed up by a plan to take forward any actions.

Reporting on the effectiveness of internal controls remains at an early stage with work to do for many companies before the commencement of new Provision 29 of the 2024 Code. No early adopters of Provision 29 of the 2024 Code were noted.

Remuneration

Clear and transparent disclosures regarding remuneration and the activities of the remuneration committee are essential for enabling shareholders to engage effectively on remuneration. The FRC believe it is essential that the rationale behind key decisions on remuneration is clear and understandable.