This is the first article in our series that addresses specific elements of a company’s annual reporting requirements. In this article, we will examine the requirements for making ‘corporate governance statements’ and outline which companies need to prepare one, what needs to be reported, and where it goes in your company’s annual report. This series will also cover other keys sections of the annual report, such as the Directors’ Report.
Company annual reporting can seem quite complex, MSP Company Secretarial has a wealth of experience helping companies of all sizes, whether it’s public, private, listed, quoted, traded, limited by shares or by guarantee, navigate reporting obligations and assist the organisation with its annual reporting requirements.
Unless explicitly referenced otherwise, any reference to a section of legislation in this article will be a reference to the Companies Act 2006.
Which companies are required to make corporate governance statements?
Companies that fall into one of the following two categories are required to report on their corporate governance practices:
- category 1 companies need to report their “corporate governance arrangements”
- category 2 companies need to prepare a “corporate governance statement”:
- SI 2008/410 Schedule 7, Part 8 requires companies that satisfy one of the following criteria to provide a statement of corporate governance arrangements as part of the company’s Directors’ Report:
a) Over 2,000 employees
b) The company has:
c) A turnover of over £200 million, and
d) Its balance sheet total exceeds £2 billion.
2. Companies that are subject to disclosures under the UK Market Abuse Regulations (UK MAR) are required to provide a corporate governance statement1.2 – which means the statement holds the information that satisfies s. 472A (see next section), viz. Disclosure and Transparency Rules: DTR 7.2.1 R to 7.2.11 R.
In essence, a listed company required to observe the UK MAR regime prepares a corporate governance statement, and large non-listed companies satisfying the criteria under point 2 above are required to prepare a statement of corporate governance arrangements for inclusion in the company’s Directors’ Report.
MSP Company Secretarial can provide guidance and support creating corporate governance statements. Contact us here to find out how
1DTR 1.1.1 R.
2SI 2008/410 Sch 7, Pt 8, para 22(a).
Statement of corporate governance arrangements
Companies with (i) over 2,000 employees and/or they have a turnover exceeding £200 million with a balance sheet total over £2 billion, and (ii) are not a listed company (a company required to disclose under the UK MAR regime), need to include a statement of corporate governance arrangements in the company’s Directors’ Report.
The contents of this statement of corporate governance arrangements are defined by SI 2008/410 Schedule 7 Part 8 paragraphs 26 and 27. Paragraph 25 of this SI defines “corporate governance” as:
a) the nature, constitution or functions of the organs of the company,
b) the manner in which organs of the company conduct themselves,
c) the requirements imposed on organs of the company,
d) the relationship between different organs of the company, and
e) the relationship between the organs of the company and the members of the company, and “corporate governance code” means a code of practice on corporate governance.
In outline, a company required to prepare a statement of corporate governance arrangements needs to report:
- the corporate governance code it applied in the year being reported, if any;
- how the company applied this code of corporate governance; and
- explain where it departed from the corporate governance code and why.
Where a company chooses not to adopt a corporate governance code, then “the statement of corporate governance arrangements must explain the reasons for that decision, and explain what arrangements for corporate governance were applied for that year” (SI 2008/410, Sch 7, Pt 8, para 26(2)).
Where a company is required to prepare a statement of corporate governance arrangements and the company is unquoted – typically companies that are not listed on a UK or EEA regulated market (or admitted to dealing on NYSE or NASDAQ) and are not included in the Official List – then the details of the company’s corporate governance arrangements must be available on a website as detailed in paragraph 27 of Part 8 of Schedule 7. So, private companies and AIM companies are classed as unquoted companies.
What is the “corporate governance statement”?
Regarding company reporting, section 472A says:
“corporate governance statement ” means the statement required by rules 7.2.1 to 7.2.11 in the Disclosure Rules and Transparency Rules sourcebook made by the Financial Conduct Authority.
Those rules were inserted by Annex C of the Disclosure Rules and Transparency Rules Sourcebook (Corporate Governance Rules) Instrument 2008 made by the Authority on 26th June 2008 (FSA 2008/32).
This means that companies required to comply with the Disclosure Guidance and Transparency Rules sourcebook (DTR) need to prepare a corporate governance statement. Companies that are subject to the MAR (Market Abuse Regulations) regime are required to comply with DTR (DTR 1.1.1 G; UK MAR Article 22).
DTR 7.2 Corporate governance statements sets out the details that need to be reported in the company’s Directors’ Report. The minimum reporting requirement satisfies DTR 7.2.2 R to 7.2.7 R, with additional reporting in accordance with DTR 7.2.8A R and 7.2.10 R, where applicable (DTR 7.2.1 R).
| DTR | Outline of requirement* |
| 7.2.2 R | Reference to (i) corporate governance code company subjected to; (ii) the corporate governance code voluntarily applied; and (iii) “all relevant information about the corporate governance practices applied over and above the requirements of national law”. |
| 7.2.3 R | (i) where the code applied can be found; (ii) where the company has departed from the requirements of the code; (iii) details where company’s corporate governance practices publicly available; and (iv) explain decision not to refer to a corporate governance code. |
| 7.2.5 R | A description of the main features of the issuer’s internal control and risk management systems in relation to the financial reporting process. |
| 7.2.6 R | The corporate governance statement must contain the information required by paragraph 13(2)(c), (d), (f), (h) and (i) of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (information about share capital) where the issuer is subject to the requirements of that paragraph. |
| 7.2.7 R | The corporate governance statement must contain a description of the composition and operation of the issuer’s administrative, management and supervisory bodies and their committees. |
| 7.2.8A R | (i) provide a description of the company’s diversity policy, the objectives of the policy, how the policy has been applied, and the diversity-related results in the reporting period; and (ii) if there is no diversity policy then give a reason. |
| 7.2.9 R | Reporting requirements to follow where a company prepares a separate report addressing corporate governance requirements. |
| 7.9.10 R | Requirement to prepare a group directors’ report within the meaning of section 415(2) of the Companies Act 2006 must include in that report a description of the main features of the group’s internal control and risk management systems in relation to the financial reporting process for the undertakings included in the consolidation, taken as a whole. |
| 7.2.11 R | Details required where a company elects to include its corporate governance statement in a separate report as permitted by DTR 7.2.9R(1) must provide the information required by DTR 7.2.10R in that report; and requirement to make these details publicly available on the company’s website. |
[* Requirement is summarised briefly here – consult the DTR disclosure requirements here for full details of compliance requirements specified in the individual DTRs.]
Commercial companies & corporate governance reporting (annual report)
Additionally, companies in the commercial company category need to comply with UKLR 6.6.6 (5) and (6) when preparing their annual financial report:
- (UKLR 6.6.6 R(5)): a statement of how the listed company has applied the Principles set out in the UK Corporate Governance Code, in a manner that would enable shareholders to evaluate how the principles have been applied; and
- (UKLR 6.6.6 R(6)): a statement as to whether the listed company has:
(a) Complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code; or
(b) not complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code, and, if so, setting out:
(i) those provisions it has not complied with;
(ii) in the case of provisions whose requirements are of a continuing nature, the period within which, if any, it did not comply with some or all of those provisions; and
(iii) the company’s reasons for non-compliance;
The MSP guide to annual reporting
Now that we have covered the Corporate Governance Statement, our multi-part series will address the broader requirements of a company’s Directors’ Report.
How MSP Company Secretarial can help your company’s annual reporting (and AGM)
As a full-service company secretary, MSP Company Secretarial can assist with your company’s annual reporting requirements including:
- Your company’s annual statutory filings
- Assisting with your company’s annual report preparation
- Supporting PLCs preparing for the company’s AGM.
The Corporate Governance Statement: Frequently Asked Questions
What is the relationship between a Corporate Governance Statement and a Directors’ Report?
For companies required to prepare a Corporate Governance Statement (as described in this article), unless a company chooses to produce a separate corporate governance report (s. 472A(3)), then the corporate governance statement forms part of the Directors’ Report.
How often should a Corporate Governance Statement be updated or reviewed? What are the common best practices?
Typically, as the Corporate Governance Statement forms part of the Annual Report, it gets reviewed and updated every 12 months. However, the governance structure, business controls and frameworks the statement refers to should be reviewed and evolved continuously. Any significant changes that will have a dramatic effect on decision-making processes, compliance or performance should be disclosed before waiting for the annual cycle.
How are ESG considerations integrated into a Corporate Governance Statement?
ESG considerations represent a broader scope than the topics addressed by the Corporate Governance Statement. Issues like board diversity and related matters addressed by the company’s adopted corporate governance code are addressed in the Corporate Governance Statement. For companies required to follow the UK Listing Rules, then environmental matters are addressed via TCFD disclosures required by UKLR 6.6.6(8) R and UKLR 22.2.24 R.
ESG related reporting is also covered by a company’s ‘non-financial and sustainability information statement’ (ss. 414CA and 414CB). Greenhouse gas emissions and energy usage for some quoted and unquoted companies is addressed by SI 2008/410 Sch 7, Parts 7 and 7A.
There are many considerations when it comes to ESG and Corporate Governance reporting and MSP Company Secretarial is able to help you navigate these disclosures.
How can Corporate Governance Statements affect investment?
There is no simple answer here, and too broad a topic to answer properly. Typically as the number of shareholders of a company increases then shareholders cannot be involved in the management and control of their company and so shareholder ownership becomes separate from director control (the ‘agency problem’). Corporate Governance regimes attempt to address this problem through practices and disclosures that encourage the shareholders to trust a company’s board of directors to behave properly and honestly and in the best interests of the company, its directors, and its owners. It is therefore easy to suggest that investors prefer a company whose practices and transparency favour the best interests of its stakeholders.
Other articles you may be interested in:
A guide to company reports. What to report and in what format.
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