Third of businesses do not meet corporate governance requirements

 13 November 2016

 Compliance with the corporate governance code among Britain's largest listed companies is rising, but more than a third of companies are still failing to meet its requirements.

New research from Grant Thornton, which reviews annual reports to assess compliance with the voluntary code each year, has found that 62 per cent of FTSE 350 companies are now in full compliance with the code, compared with 57 per cent last year.

Compliance among larger companies outstrips that at smaller: nearly three-quarters of FTSE 100 companies - 72 per cent - comply fully with the code, while just 57 per cent of the FTSE 250 do so.

Only 15 per cent of companies were willing to outline details on their considerations and plans for succession, and only a fifth provided any real insight into their organisational culture.

The research also found that shareholder engagement was on the slide, with just over a third of businesses - 36 per cent - clearly demonstrating how they engaged with shareholders, down from 55 per cent in 2015 and the lowest it has been in five years.

Simon Lowe, partner at Grant Thornton, said: "More companies are recognising the commercial imperative of maintaining effective governance practices, yet there remains substantial room for improvement as a large proportion still opt for the bare minimum, complying only with the rules but not fully embracing the principles of the code."

The research comes as expectations of an imminent revision to the code - anticipated for 2018 or 2019 - are rising. Prime minister Theresa May has been vocal about her desire to shake up boardrooms and "get tough on irresponsible behaviour in big business", recently exemplified most starkly by the failure of BHS and employee treatment at Sports Direct. She has proposed putting workers on boards and implementing measures to rein in excessive executive pay.

Meanwhile, the new Hampton-Alexander review into gender representation at senior corporate levels has recommended a revision to require FTSE 350 companies to disclose the balance of men and women at senior levels on an annual basis as part of their responsibilities under the code.

On Wednesday, the review set new targets for FTSE 100 companies to have a third women on their boards, executive committees and among employees directly reporting to the executive committee by 2020. More than three-quarters - or 76 per cent - of the companies in the Grant Thornton research mentioned aspects of board diversity other than gender in their annual reports, up from 56 per cent last year, suggesting the issue has moved higher up companies' agendas.

The code, which was formerly known as the combined code, sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

All companies with a premium listing of equity shares in the UK are required under the listing rules to report in their annual report and accounts on how they have applied the code, which is published by the Financial Reporting Council.

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