With the spring AGM season rapidly approaching for UK PLC now is a good time to take stock of the key trends which emerged from the 2014 reporting season. Practical Law’s ‘What’s Market’ service has published a review of Annual Reporting and AGMs in 2014 which highlights the major developments.
The UK Corporate Governance Code (Code) requires the board of a listed company to have the appropriate balance of skills, experience, independence and knowledge of the company to enable the directors to discharge their respective duties and responsibilities. Judging by the changes in board composition over recent years, this continues to be an area of focus for directors.
In 2014, the average FTSE 100 board consisted of 11 directors, with an average of 7 non-executive directors (both figures comparable with those for 2013). Two companies have boards which are exclusively made up of non-executive directors.
One of the key focuses for boards in recent years has been increasing the proportion of female directors with Lord Davies’ ‘Women on Boards’ report setting a target for FTSE 100 companies of at least 25% female representation by 2015 (although whether that meant the beginning or the end of 2015 is not clear). However, it appears that companies are taking this recommendation on board (so to speak) with 38 FTSE 100 companies having already achieved the voluntary 25% target. Whether the other 62 companies will manage to do likewise before the end of the year remains to be seen. And whilst 23% of all FTSE 100 directors are now female, 90% of these are non-executive posts, suggesting that many female directors continue to have limited involvement in the day to day running of their companies.
The Code recommends that an evaluation of the board should be conducted by an external body every three years. During 2014, 40% of FTSE 100 companies disclosed that they had used the services of an external board evaluation facilitator, revealing a growing trend towards the use of interviews (rather than questionnaires) as the key method employed for board evaluation. However, only 8 FTSE 100 companies also requested feedback from non-board members as part of the board evaluation process.
From 1 January 2015 all FTSE 350 companies are required to put their statutory audit engagement out to tender at least once every ten years. This is designed to address the adverse effects on competition in failing to properly tender for that appointment as identified by the Competition Commission (now the Competition and Markets Authority) in its investigation of the market for statutory audit services.
According to the Practical Law review, 27 FTSE 350 companies put their audit engagement out to tender during the 2013/2014 reporting season, with 19 of those tenders resulting in a change in auditor.
However, 82% of FTSE 100 companies indicated that they were planning to undertake an audit tender by 2018. The percentage was slightly lower (76%) for FTSE 250 companies.
Compliance with the Code
Whilst overall compliance with the Code increased during 2014, almost a third of FTSE 350 companies reported a deviation from at least one provision of the Code in their 2013/2014 annual report (down from 127 in 2012/2013). In addition, although the general trend is for increased compliance, those companies which are not complying are deviating from more provisions on average than non-compliant companies in the previous year.
The provisions of the Code resulting in the most deviations are that requiring 50% of the board to be independent and that relating to the composition of the remuneration committee. Only 10 companies failed to comply with the requirement for the role of chief executive and chairman to be carried out by different people (down from 18 in 2013).
Big guys lead the way
The results of the Practical Law review suggest that the UK’s largest companies appear to be taking the issue of corporate governance more seriously, with the general trend being that of greater compliance with the Code. However, as we reported previously (see No change at the top), an earlier report from The Quoted Companies Alliance and UHY Hacker Young suggested that levels of compliance amongst small and mid-size companies had stagnated, with progress in some areas but regression in others. Will 2015 see the improved practices of the FTSE 350 filter down to the rest of the market?