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On 11 November 2020, the Financial Conduct Authority (FCA) published its review of listed companies’ compliance with the FCA’s rules relating to corporate governance disclosures. The FCA concluded that there is room for improvement across all categories of listed issuers.
This post covers each of the key messages from the FCA.
Statements made by premium listed issuers of how they have applied the Principles set out in the UK Corporate Governance Code (LR 9.8.6R (5))
The FCA encourages companies to do more than merely state that the Principles have been applied. The FCA's review found that it was difficult to assess how some premium listed issuers had applied certain aspects of the Principles. An issuer which is subject to this listing rule should consider whether it has made this statement in a manner that would enable shareholders to evaluate how the Principles have been applied.
The FCA noted that in certain cases it was difficult to understand from the statements made how issuers had applied Principle F relating to the chair's responsibility for leadership of the board and Principle H relating to non-executive directors providing constructive challenge.
The comments made by the FCA should not come as a surprise. The Financial Reporting Council notes in the introduction to the UKCGC that "It is important to report meaningfully when discussing the application of the Principles and to avoid boilerplate reporting. The focus should be on how these have been applied, articulating what action has been taken and the resulting outcomes. High-quality reporting will include signposting and cross-referencing to those parts of the annual report that describe how the Principles have been applied. This will help investors with their evaluation of company practices."
Specific details of how the Principles have been applied
Issuers with a premium listing are also encouraged to include specific details of how the Principles have been applied in the relevant accounting period using examples and cross-references where appropriate.
Avoiding boilerplate disclosures
The FCA was surprised to find that in many cases a significant proportion of the corporate governance report remained the same during the periods under review. Although this may reflect the fact that issuers have established corporate governance frameworks which do not change year on year, the FCA recommends that premium listed issuers render these disclosures "less "boilerplate" by including examples and / or cross references to disclosures elsewhere in the annual report evidencing good corporate governance".
Board diversity reporting
The quality of board diversity reporting was singled out for criticism. In some cases, the FCA found it difficult to determine how premium listed issuers had applied what are now Principles J and L with respect to board diversity reporting.
By way of reminder Principle J states that: "Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths."
Principle L is expressed in the following terms: "Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively."
The FCA's review also highlighted several points of particular relevance to closed -ended investment funds and issuers with a standard listing.
The review is available at https://www.fca.org.uk/publication/primary-market/pmb-31-corporate-governance-disclosures-listed-issuers.pdf
Background
The UK Corporate Governance Code (UKCGC) applies to all companies with a premium listing. The UKCGC is divided into Principles and Provisions. Chapter 9 of the listing rules which deals with the continuing obligations of issuers with a premium listing covers both the Principles and the Provisions.
LR 9.8.6R (5) requires an issuer incorporated in the UK with a premium listing to include in its annual financial report a statement of how the listed company has applied the Principles set out in the UK Corporate Governance Code, in a manner that would enable shareholders to evaluate how the principles have been applied.
The Provisions are covered by the "comply or explain" regime in LR 9.8.6R (6). An issuer can either include a statement that it has complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code or a statement that it has not complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code.
If the issuer has not complied with the relevant provisions throughout the relevant period then the issuer must set out:
