Boards pay lip service to governance, regulator says
The UK's corporate governance regulator said too many companies paid lip service to requirements on pay and diversity and that it was unhappy with boards' response to its improved code of standards.
The Financial Reporting Council said too often companies that do not comply with requirements offer vague explanations year after year. This casts doubt on whether boards value good governance and openness, the FRC said in a report.
Companies often took a "box-ticking" approach to governance by complying with the process and no more. On board diversity, many companies said the subject was important but offered few targets or other evidence for their statements.
Most companies had included code recommendations in their pay policies and said they had considered what workers were paid when setting bosses' pay, the FRC said. But there was little evidence of how pay policies had been discussed with shareholders and other interested parties.
Jon Thompson, the FRC's chief executive, said: "It’s clear that some companies are continuing to take a formulaic approach to corporate governance driven by compliance, rather than focusing on outcomes. Whilst we have found examples of good reporting, overall, we are disappointed with the response to the new code."
The FRC introduced an updated governance code in 2019 that required companies to consult with workforces, improve oversight of executive pay and broaden representation at the top of the business. The changes were spurred by high-profile company collapses such as Carillion and Thomas Cook and unease over soaring executive pay.
On Thursday the FRC called on boards to explain clearly how they comply with guidelines, show how they were affected by discussions with shareholders and others, improve monitoring of company culture and take direct actions to improve diversity at the top.
Investors have been taking a tougher line over bosses' pay during the Covid-19 pandemic as companies have cut jobs, shelved dividends and taken government help. Thompson said boards should make sure their governance holds up during the crisis.
"Maintaining integrity in board decision-making, the management of risk, and effective engagement with all stakeholders, are essential for maintaining the trust which attracts the investments on which our economy relies," he said.