Newsflash – FRC Review of corporate governance reporting

The Financial Reporting Council (FRC) has released its 'Annual Review of Corporate Governance Reporting', which is based on an analysis of the annual reports from a sample of 100 randomly selected companies adhering to the UK Corporate Governance Code. This sample encompasses a diverse range of entities, including FTSE 100, FTSE 250, and Small Cap organisations.

The comprehensive report identifies prevailing trends in corporate governance reporting, provides commentary on areas demonstrating high-quality disclosure and pinpoints opportunities for strengthening or streamlining annual reports. Preparers and reviewers of annual reports, particularly members of the audit committee, should ensure that their respective companies are well prepared in advance of their year ends to address the recommendations and to consider matters for ongoing improvement.

The Executive Summary makes the following point:

“The high-level principles of the Code offer companies the flexibility to design their corporate governance in a way that suits their individual circumstances, with specific provisions suggesting a good practice approach. Companies that depart from this can explain why their approach to governance is right for them. This transparency assures investors of good governance and supports companies in meeting their obligations against the Listing Rules.”

As last year, the FRC notes that there have been many positive developments in reporting, in particular in areas such as company purpose, culture and values, shareholder and stakeholder engagement and diversity and inclusion. The review highlights the benefits of moving towards more outcomes-based reporting, focusing less on the inclusion of lengthy policies and more on describing the actions taken during a given year and the impact those actions have had.

To help companies streamline their governance reporting, the FRC suggests considering the following points:

• Focusing on board actions and outcomes cutting down reporting on matters without involvement from the board.
• Avoiding narrative that might not be material for readers of the annual report.
• Eliminating generic statements that offer little or no insight.
• Avoiding duplication in areas such as stakeholder engagement or risk management.
• Minimising repetition of language from the UK Corporate Governance Code or other regulation or guidance without offering context or practical insight.

Throughout the report, the FRC also draws out key messages that might help companies to strengthen their reporting in the areas covered by the Code:

• Clear and specific explanations of non-compliance with the Code better inform and support stakeholder understanding.
• Explaining how the directors promote the desired culture can demonstrate how they model the behaviours that reflect the company’s values.
• Reporting on shareholder activities and outcomes achieved provides greater clarity for readers on the work undertaken by the board during the year and how their perspectives inform decision making.
• Annual reports could be made more informative and valuable to investors if companies disclosed the specific factors they consider when evaluating directors’ time commitments moving away from a numerical approach to overboarding.
• Provide company specific and time relevant information on the role of the Senior Independent Director (SID) (not just repeating the wording in Provision 12) and explain the activities of the SID during the year.
• Where the Code includes specific responsibilities for the board committees and calls on the committee to explain their work, the expectation is that the disclosure should confirm whether each of the assigned responsibilities have been met.
• Reporting on interactions with the FRC’s Corporate Reporting Review and Audit Quality Review teams provides valuable transparency to investors. The appropriate length and detail of the disclosure depends on the nature of any interactions.

Review of risk management and internal control systems – getting ready to report on the new declaration on the effectiveness of material controls

Another area of focus has been the extent to which companies are preparing for the implementation of the new Provision 29 on risk management and internal control, which comes into force for financial years starting on or after 1 January 2026. The FRC found that more than half of companies mentioned the new provision, with many providing further information on how they are preparing.

As a reminder, the new Provision 29 is much more specific seeking to provide transparency of how the board has discharged its responsibilities to monitor and review effectiveness of the risk management and internal control framework and also, as a result of that monitoring and review activity, what was the conclusion on the effective operation of material controls as at the balance sheet date. This requirement only builds upon the existing Provision 29, which already requires companies to describe the process for reviewing the effectiveness of risk management and internal control systems. Thus boards should explain in the annual report how they have monitored and reviewed the effectiveness of the material controls, including financial, operational and compliance controls.

In terms of how the outcome of the effectiveness review was reported, the FRC found that there has been little change in the reporting since their last review:

• 43 companies stated that their systems were adequate or effective;
• 33 companies stated that no weaknesses were identified;
• 16 companies stated that their systems are effective and that no weakness was identified; and
• 40 companies did not report on the outcome.

To read the full FRC Review of corporate governance reporting click here.