Companies are getting better at disclosing boardroom diversity policies and there has been an increased level of audit tendering activity over the past year, but providing high quality explanations of disclosures remains their 'Achilles heel', according to the Financial Reporting Council (FRC).
In its annual review of the Corporate Governance and Stewardship Codes, the FRC says companies have already started to supply information which will be mandatory from next year following changes made in October 2012. There has been an uptake in signatories to the Stewardship Code with signs of better engagement with large companies by investment managers.
However, the FRC says early adoption of new reporting recommendations on the activities of the audit committee and confirmation that reports and accounts are fair, balanced and understandable has been less widespread.
Baroness Hogg, FRC chairman said: 'Companies and investors need to demonstrate that there is substance behind their statements of good intent. While both have made progress in this regard, there is clearly more still to do. While companies are getting better at describing their actual governance arrangements, many still struggle to articulate clearly why they have chosen to deviate from the Code.'
The review identified high levels of compliance with the new recommendations added to the Code, including the almost universal adoption of annual director elections among FTSE 350 companies. However, the FRC says mid and small-cap companies in general have less informative reporting than larger companies.
The regulator says companies should focus on board succession planning which is often highlighted as requiring attention during external effectiveness reviews, and the FRC is to undertake a project in 2014 to identify good practice in this area.
While the Stewardship Code now has nearly 300 signatories, the FRC says the quality of their reporting is variable. Nearly half of the signatories have not yet updated their public statements over a year after a revised edition of the Code took effect. The FRC is considering mechanisms for ensuring that statements are complete and up to date, and possible sanctions if they are not.
The review identified what the FRC calls 'real and perceived' barriers to effective stewardship and says it has concerns about an emerging 'engagement deficit' affecting mid-market companies, partly because of the perception that proxy advisors wield undue influence over voting outcomes.
The FRC is currently considering possible changes to the UK Corporate Governance Code for 2014 and will launching a consultation in Q2 2014.
