uk-corporate-governance-review-and-trends-2015

CORPORATE GOVERNANCE REVIEW 2015
Trust and integrity
– loud and clear?

2015 highlights
0
10
20
30
40
50
60
70
80
90
100
57%
fully comply with UK
Corporate Governance
Code, down 4%
0
10
20
30
40
50
60
70
80
90
100
55%
quality shareholder
engagement falls
from 64%
0
10
20
30
40
50
60
70
80
90
100
24%
gives the same risk
disclosures as last
year despite continuing
volatility
0
10
20
30
40
50
60
70
80
90
100
77%
made no statement
as to their ability to
continue operation in
the longer term
make only a passing
reference to culture
and values
Annual reports
of FTSE 350 companies
that do not comply give
good explanations why
not, up 59%
provide incisive, high-
quality accounts of
their business models,
up from 61%
of chairmen personally
discuss culture in their
primary statements,
up from 5% in 2013
73%
OFF
ON
69%
73%
54%
13%
+50%
LONGEST
516
pages
SHORTEST
64
pages
(+3 pages)
AVERAGE
158
pages
Front end > Back end
96
pages
61
pages
50%
11 11
produce a strategic
report that complies
with the regulations
companies truly
embraced the spirit
show detailed links
between remuneration
and wider strategy
nomination committees
did not meet during the
reporting year, 4 of them
appointed new NEDs
14%

The regulator’s perspective 2
Foreword 3
The strategic report 5
Governance 18
Nomination committee 25
Audit committee 33
Remuneration committee 37
Recent developments 40
Appendix 1 – Supporting data 43
Appendix 2 – New entrants 63
The Grant Thornton Governance Institute 64
About Grant Thornton 66
Contents
Methodology
This review covers the annual reports of 312 of the UK’s FTSE 350 companies
with years ending between June 2014 and June 2015. Investment trusts are
excluded as they are permitted to follow the AIC Code of Corporate Governance.
The review assesses compliance with:
• the disclosure requirements of the UK Corporate Governance Code 2014
• the requirements for narrative reporting as set out in S414c of the
Companies Act 2006 as amended.
Key findings are discussed in the body of this report with full details in
the appendices.
Simon Lowe would like to thank Claire Fargeot, Yaryna Kobel,
Sergio Lopez Varela, Nash Matinyare, Natasha Teeling, Daniel Wade
and Alex Worters for their help in preparing this report.
investor viewpoint
Simon would also like to give special thanks to Eugenia
Unanyants-Jackson for providing investor viewpoints
throughout this year’s review and for her support in our
training work. Eugenia is formerly a Director of Governance
and Sustainable Investments at BMO Global Asset
Management EMEA.
CORPORATE GOVERNANCE REVIEW 2015 1

The regulator’s perspective
“The FRC’s mission remains to promote high quality corporate governance
and reporting to foster investment. We seek to build justified confidence
in the UK framework for corporate governance and reporting and to
promote a principles-based approach in EU and international fora.”
Sir Winfried Bischoff, Chairman, Financial Reporting Council
Grant Thornton’s high quality research
and analysis in this report helps the
FRC track the implementation of the
UK Corporate Governance Code and
related developments.
The 2015 figures show a slight
drop in the number of FTSE 350
companies who complied with all but
one or two Code provisions (90%
compared to last year’s 93.5%). And
overall the level of full compliance for
the FTSE 350 has decreased slightly
from 61% to 57%. However this
is offset by an improvement in the
quality of explanations, with 69.4%
providing good quality explanations
against 59.3% last year. There were
also a higher number of new entrants
to the FTSE 350 this year, which has
contributed to the small decrease in
compliance.
The FRC is currently undertaking
a project on corporate culture. The
report notes that while only 54% of
companies make a passing reference
to culture and values, more FTSE 350
chairmen discussed culture in their
primary statements. However, Grant
Thornton note that while some give
culture the prominence it deserves
and provide good insight into this
important topic, the majority of
commentaries are fragmented, “giving
the impression that culture and values
are neither embedded nor driving
behaviour within the business.” I hope
to see a marked improvement in this
area next year as our culture project
gathers momentum in 2016.
As stewardship – how investors
engage with companies – is a topic
of considerable interest to me, it is
disappointing that more companies
this year have said their Chairmen
and Senior Independent Directors
were available for meetings and
discussions with shareholders but that
few were requested. One of the key
messages I received from Chairmen
this year is that it is just as important
to maintain dialogue when business
is going well as it is when there are
specific issues to be addressed. Open
lines of communication and the
exchange of information promote
greater confidence on both sides. The
need for better quality shareholder
engagement remains a priority for the
FRC and we intend to make a further
announcement about this shortly.
There have been a handful of early
adopters of the 2014 Code provision
for companies to produce a viability
statement but we understand the vast
majority are using this interim period
to enhance their internal risk processes.
The finding that 24% of the FTSE 350
gave the same risk disclosures as last
year – despite continuing volatility and
a focus on business risk and controls –
shows there is more work to do here.
It is clear that 2015 has been a
period of consolidating and preparing
to implement both the 2014 Code
amendments and other narrative
reporting changes. While there
remain a number of challenges the
report also highlights many positives
– such as an increase in “incisive,
high-quality accounts” of company
business models. The key for boards
in discharging their governance
responsibilities is the focus on
effective, entrepreneurial and prudent
management that delivers long-term
success.
Congratulations and thanks to
Grant Thornton for yet another
thoughtful report.
2 CORPORATE GOVERNANCE REVIEW 2015

2015 was a quieter year in terms of regulatory change, with the Financial
Reporting Council (FRC) tweaking around the edges rather than making
full-scale changes to the UK Corporate Governance Code (‘the Code’) as
happened in 2014. This year’s key areas of focus were company culture,
succession planning, the ‘comply or explain’ principle, the Stewardship
Code and proxy advisers. To a large degree the market is still digesting
last year’s developments, and companies are getting used to making robust
explanations and disclosures rather than seeking to fully comply.
Foreword
Welcome to Grant
Thornton’s annual
analysis of the
governance practices
of the UK’s FTSE 350
companies.
Simon Lowe, Chairman,
The Grant Thornton
Governance Institute
Strategic reports proliferate but
standards vary
The introduction of the strategic report in
2014 has been embraced, with 96% of FTSE
350 companies producing a report; however,
quality continues to vary. Strategic reporting
efforts have not yet led to more concise
reporting, as originally intended. In fact, the
front end of annual reports continued to
grow in 2015, albeit at a slower pace, with
the narrative now more than 50% longer
than the financial statements.
This year we have seen an improvement
in the quality of commentary regarding
in-year performance and operating
environment, with 80% of companies now
giving informative insight (2014: 77%).
Additionally, significant steps have been
made in improving the insight given into
the business model (2015: 73%, 2014: 60%).
While this shows good progress, companies
continue to struggle to articulate their
forward looking perspective, with only 41%
giving a good or detailed explanation.
In looking at the strategic report in
more detail we found that 50% (2014: 28%)
of companies were applying the Strategic
Report Regulations in their entirety,
although with significant variation in quality
and approach. Of these, only 11 companies
(2014: four companies) gave an informative,
holistic view of the business covering all
requirements of the regulations.
The Strategic Report Regulations were
developed with the hope of improving
business reporting in terms of alignment,
clarity and focus. Despite this, only 41%
of companies transparently link strategy,
key performance indicators and strategic
risk; 54% of companies do not report their
CSR approach holistically with strategy and
business model; and only 14% of companies
link remuneration to strategic approach
within the strategic report.
For the first time this year, we analyse the
quality and profile of reporting on corporate
culture and values. One fifth of FTSE 350
chairmen give culture the prominence it
deserves and provide good insight into this
important topic but only half of these use
their primary statement to emphasise its
importance. The majority, however, do not
and their commentaries are fragmented,
giving the impression that culture and values
are neither embedded nor driving behaviour
within the business.

Foreword
Compliance, or rather non-compliance, is a feature of
this year’s review. Although effective governance does
not necessarily mean full compliance with the Code, it is
worrying to see levels of compliance dropping across the
market. The principle of comply or explain allows every
company to have individual governance arrangements that
reflect their specific needs and, therefore, it is the quality
of explanations, and not the compliance score itself, that
companies and investors should be concerned with.
Better quality explanations
There was a notable rise in the quality of explanations.
Almost 70% of FTSE 350 companies (2014: 57%)
performed well in this area: setting out their reasons for
non-compliance; explaining their alternative arrangements
for maintaining good governance; and providing timeframes
for ad-hoc provisions and specific details about why the
board considers these arrangements appropriate.
Although there are changes every year in the composition
of the FTSE 350, 2015 saw a higher than usual number of
new entrants, skewing the results of overall benchmarking.
Of the 23 new entrants, two joined the FTSE 100, with the
remainder forming part of the Mid 250. Only one of the two
new joiners to the FTSE 100 did not comply fully with the
Code, while 20 of the 21 new entrants to the Mid 250 did not.
Perhaps the market should place more pressure on sponsors
to ensure full compliance before such companies come to
market seeking fresh capital?
So what were the reasons for non-compliance? Overall
the balance of independent representation on the board
(B.1.2) continues to be the most common cause for non-
compliance with 12.8% of FTSE 350 companies and 48% of
new entrants failing to comply with this provision. One of
the main causes within the FTSE 100 was the failure to tender
the external audit contract, with companies saying they were
waiting another year to assess the impact of the EU Directive
and Regulation on audit. This becomes effective for financial
years beginning on or after 17 June 2016 and includes
mandatory audit firm rotation and significant restrictions on
non-audit services.
The closing months of 2015 saw the first companies to
adopt the viability statement reporting requirement. There
remains some confusion as to whether the viability statement
is another form of ‘going concern’ statement or whether it
has a different purpose and so should be disclosed elsewhere.
The Code refers to the provision of safe harbour if companies
include the viability statement within the strategic report, or
at least make reference to it there.
For the first time this year, this review features practical
toolkits with reporting tips at the end of each section.
We hope you enjoy reading the review and find these
toolkits useful.
“2015 was a quieter year in terms of regulatory changes, with the FRC tweaking around the edges
rather than making full-scale changes to the UK Corporate Governance Code.”

FAST
FACTS
• 50% of FTSE 350 companies
applied all the Strategic Report
Regulations, with varying quality
and approach, this compares to
28% of companies last year
• Only 11 companies applied all
the regulatory requirements in
a connected, transparent and
informative way
• Only 33% of companies were able
to give detailed insight into their
in-year performance, their
business model and their likely
future developments, compared to
24% in 2014
• Companies continue to struggle
most with their forward looking
reporting with only 41% giving a
good or detailed disclosure, yet
when discussing past performance
80% of companies give high
quality disclosures
• 24% of FTSE 350 companies have
not updated their principal risk
disclosures since the previous
year’s report
The strategic report
The evolution of the strategic report
“Information is material if its omission or misrepresentation
could influence the economic decisions shareholders take on the
basis of the annual report as a whole. Only information that is
material in the context of the strategic report should be included
within it. Conversely, the inclusion of immaterial information
can obscure key messages and impair the understandability
of information provided in the strategic report. Immaterial
information should be excluded from the strategic report.”
(Strategic Report Guidance 5.1)
Following the introduction of the strategic reporting requirements
first reflected in our 2014 report, the number of companies producing
a strategic report has grown to 96% of the FTSE 350, up from 82%.
However, a significant number continue to shoehorn old formats into
the new requirements without re-thinking the appropriateness and
relevance of their reporting style or content. This is in line with our
experience: it usually takes four to five years for companies to adapt
their reporting to the latest regulatory requirements and embed them
into ordinary processes.
In assessing the full requirements of the Strategic Report
Regulations we found 50% of companies applying all provisions
compared to 28% last year, showing a significant improvement.
Despite this, the issue of varying quality and approach continues
and in fact, on further investigation, only 11 companies had applied
all provisions to a high quality, providing holistic, transparent and
informative insight to readers. In addition, half-hearted measures –
providing a short summary and then signposting other sections in the
accounts, or lumping all previous information into a new section called
the strategic report – still dominate.
Continuing – but slowing – pagination growth
“The strategic report should be comprehensive but concise.”
(FRC Guidance on the Strategic Report, 6.7)
This year, for the first time since 2009, we saw a slowdown in the
rate of growth of annual reports for the FTSE 350. The average
document has 158 pages, an increase of three pages over 2014 but much
reduced from the 11 page increase of that year. This was, however, a
continuation of the growth witnessed since 2009, when the average
length was 121 pages and the front end contributed just 64 pages
compared with 96 today.

FAST
FACTS
• The shortest annual
report, a property
trust, is 64 pages. The
longest, a high street
bank is 516 pages
• 41 companies have
annual reports which
are longer than 200
pages, of these 16
are financial services
companies
• This year the average
length of an annual
report is 158 pages,
compared to 155
pages last year
• The remuneration
report has plateaued at
18 pages on average
• The financial
statements have
reduced in average
length to 61 pages
(2014: 68 pages)
“For FTSE 350 companies,
the longest annual report
published for 2015 was 516
pages, with the shortest
coming in at 64.”
0
20
40
60
80
100
120
140
160
120.7
128.2
134.5
140.8143
154.1157.2
63.665.469.3
73.877
86.1
96.4
Annual report Front end Back end
57.1
62.865.2676668
60.9
Average page length of annual report
This year, for the first time since 2009, we saw a slowdown in the rate of growth
of annual reports for the FTSE 350. The average document has 158 pages, an
increase of three pages over 2014 but much reduced from the eleven page increase
of that year. This was, however, a continuation of the growth witnessed since
2009, when the average length was 121 pages and the front end contributed just 64
pages compared with 96 today – a 50% increase in six years.
For FTSE 350 companies, the longest annual report published for 2015
was 516 pages, with the shortest coming in at 64. The eight banking sector
representatives unsurprisingly had some of the longest annual reports, averaging
336 pages, compared with 239 for the FTSE 30, 194 for the FTSE 100 and 140
for the Mid 250. The largest FTSE 30 companies tend to produce longer annual
reports, with financial statements contributing 88 pages, the strategic report 51,
corporate governance 44 and the remuneration report 24.
Length of annual reports for the FTSE 350*
0
20
40
60
80
100
120
140
160
*excludes outliers at the upper end
0 - 50 50 - 100 101 - 150
Number of pages
Numberofcompanies
151 - 200 201 - 250 251 - 300 301 - 550
2015 2014 2013 2012 2011 2010 2009

2015 2014 2013 2012 2011
Over the past five years the balance between the front-end narrative of annual
reports and the back-end financial statements has changed dramatically. In 2011
the annual report was more evenly split, with financial statements representing
exactly one half of the annual report. In 2015 the front end has swollen to become
58% longer than the financial statements. With the auditor’s attention primarily
being focused on the back end (the remuneration report also gets some attention),
the requirement for the annual reports to be “fair, balanced and understandable”
is assuming increasing importance.
Business models advance
“The strategic report has three main content-related objectives: to
provide insight into the entity’s business model and its main strategy
and objectives; to describe the principal risks the entity faces and how
they might affect its future prospects; and to provide an analysis of the
entity’s past performance.”
(FRC Guidance on the Strategic Report, 4.4)
As a further consequence of the strategic reporting requirements, there is a
significant improvement in the number of FTSE 350 companies providing
detailed insights and high-quality explanations of their business models. This
year 73% give good and detailed insights, compared with 61% in 2014. Only two
companies provide no business model information at all, compared with around
18 last year.
Disclosures relating to the business context and external operating
environment also improved, with 80% of companies providing detailed
explanations versus 77% last year.
TO WHAT EXTENT DO COMPANIES DESCRIBE
THEIR BUSINESS MODEL? (%)
0.6 3.5
23.1
42.6
30.2
2015
5.9
2.3
31.3
21.7
38.8
2014
TO WHAT EXTENT DO COMPANIES DESCRIBE THEIR BUSINESS AND THE EXTERNAL ENVIRONMENT IN WHICH THEY OPERATE? (%)
19.9 23.0 11.7 8.8 12.1
80.1 77.0 88.3 91.2 87.9
None Some More
None
Basic
General
Good
Detailed

The missing links
“Where relevant, linkage to and
discussion of key performance
indicators (KPIs) should be … in
order to allow an assessment of
the entity’s progress against its
strategy and objectives. Similarly,
emphasising the relationship
between an entity’s principal
risks and its ability to meet its
objectives may provide relevant
information.”
(FRC Guidance on the Strategic Report,
7.10)
As in previous years, most companies
do not show clearly the links between
strategy, risks, opportunities and
KPIs. For many there is a lack of
comprehensive context and evaluation
of strategy, leaving the reader to
question the likely success of the
strategy and its delivery. For 2015,
the number of FTSE 350 companies
providing good or detailed disclosures
of such links remains flat compared
with the previous year, although there
was a fall in the number providing
no details.
In our view, the quality of
risk information and monitoring
undertaken by the board should be
demonstrated through the quality
of risk reporting. Risk disclosures
improved compared to last year,
although one third of companies
continue to provide only general or
However, when it comes to strategy
and demonstrating well-developed
thinking about anticipated business
developments, companies still
struggle. Overall, the proportion
providing high-quality, forward-
looking statements remains low (41%
versus 41% last year). The majority
of companies offer only basic insights
into corporate strategy and future
developments.
The FTSE 100/Mid 250
quality divide
Splitting this data by company size
provides another insight: there is a
significant divergence between the
larger and smaller listed businesses.
It is the smaller companies (the Mid
250) that are skewing the overall
results, since FTSE 100 firms are
improving. The Mid 250 scores for
good descriptions of likely future
developments fell rather dramatically
from 47% last year to 37% in 2015,
while their larger peers’ scores rose
from 37% to 45%.
None Some More
0
20
40
60
80
2015 2015 20152014 2014 2014
100
FTSE 350 FTSE 100 Mid 250
0.3 1.0 1.0 0 0.50.7
59.0
55.9 54.0
62.0 61.3
40.7 43.4 45.0 37.0 38.7 46.6
52.9
TO WHAT EXTENT DO COMPANIES DESCRIBE THE LIKELY FUTURE DEVELOPMENT OF
THE BUSINESS? (%)
Lessons can be learnt from the
FTSE 100. Our analysis suggests
that successful companies focus on
three particular areas:
• Specific information about how
a company differentiates itself
from its competitor
• Better alignment of strategic
objectives with KPIs and risks
• Improved explanations of how
a company generates and
preserves shareholder value,
both in the short and long term

weak risk information. However, there has been a shift
among the very best, with 25% (versus 18% last year) of top
risk-reporting companies now giving detailed insights and
more specific risk disclosures on changes during the year,
plus their impacts and links to corporate strategy –
an improvement of almost 40%.
TO WHAT EXTENT DO THE COMPANY’S STRATEGY/STRATEGIC
OBJECTIVES LINK TO SPECIFIC RISKS, OPPORTUNITIES AND KPIs? (%)
None Basic General Good Detailed
2015
15.4 22.417.3 17.1
22.1 21.123.4 23
21.8 16.4
2014
Operational risks rise
Looking in greater detail at the categorisation of these
risks, there was a shift in the reporting of operational
risks and expansion or growth risks. For 2015 operational
risks form a larger part of the total risks, increasing by
some 13% on last year. Expansion or growth-related risks
as a category decreased in importance by 38%, which is
somewhat surprising given the growth challenges faced by
most businesses. Financial, macro-economic, regulatory
compliance and technology-related risks are all on the rise,
as might be expected given the economic backdrop and the
point in the current economic cycle.
0
0.5
1
1.5
2
2.5
3
3.5
4
Risk categorisation change over recent years 2015 2014 2013 2012 2011 2010
Environm
ental
issues
Technology
Reputation
Em
ployees
Expansion/
growth
Regulation/
com
pliance
M
acro-econom
ic
Operational
Financial

76.323.7
It is alarming to note that risk disclosures for 2015 remained
identical for 24% of the FTSE 350 (more than 70 companies)
as against 30% a year earlier. Although declining, this figure
is still higher than would be expected and is surprising,
given the continuing volatility and focus on business risk
and controls.
70.129.9
2015
2014
ARE RISK DISCLOSURES IDENTICAL TO PREVIOUS YEARS? (%)
Yes No
0
0
20
20
40
40
60
60
80
80
100
100
Companies neglect risk mitigations
In considering key strategic risks and the steps taken to
prepare for adverse developments, 5% of all FTSE 350
companies give no insight into the mitigating actions in
place. This is a little surprising given the detailed revised
guidance issued by the FRC last year, urging boards to
consider how to discharge their responsibilities in relation to
risks and risk management to ensure that business controls
are embedded in business processes1
.
In looking at the KPIs disclosed to explain business
performance, scores have deteriorated somewhat.
Companies continue to find it easier to report on their
key risks rather than the measures used to monitor the
business. However, it should be noted that this year’s results
were affected by the high number of new entrants into the
FTSE 350, which have tended to lower levels of reporting
disclosures (see page 21). When new entrants are excluded,
the proportion of companies providing more detailed
explanations remains stable at 47%.
TO WHAT EXTENT DO COMPANIES DESCRIBE KPIs WHICH MEASURE
THE PERFORMANCE OF THE BUSINESS? (%)
2015
20.8
2.2 1.6
24.319.2 14.1
31.7 25.726 34.2
2014
Thirty eight per cent of companies offer good or detailed
disclosure of both risks and KPIs. While financial KPIs
continue to be reported in greater frequency than non-
financial KPIs, notable trends include the increased focus
around shareholders’ funds, operations and regulation
and compliance.
“As in previous years, most companies do not
show clearly the links between strategy, risks,
opportunities and KPIs.”
1 ‘
Guidance on risk management, internal control and related financial and business reporting’, FRC, September 2014

Companies embrace
‘understandability’ – in principle
“The board should present a fair,
balanced and understandable
assessment of the company’s
position and prospects.”
(UK Corporate Governance Code, main
principle C.1)
The 2012 Code introduced the concept
of ‘understandability’, requiring a
board to assess and declare whether it
considered the annual report to be fair,
balanced and understandable; this was
reflected for the first time in last year’s
report. All companies in the FTSE 350
bar two (2014: 25) now include such
a statement. Although two thirds still
give little or no insight into how they
substantiate the claim, there are a few,
slightly up from last year, that have
embraced the intent of the Code to
supply information about the various
criteria used to support their statement.
This demonstrates the distance
that the majority of companies have
yet to travel in embracing the spirit of
the Code. While it is easy to treat such
a statement as a compliance matter –
tick the box, make the statement and
move on – a more considered approach
contributes to investors’ understanding
of the thought processes of the board
and its commitment to clear and
transparent reporting.
0
0.5
1
1.5
2
2.5
3
Average number of financial KPIs disclosed
Revenue
Profitandcosts
Shareholders’
funds
W
orking
capital/
cashflow
Capitalexpenditure
and
otherassets
Interest,debt
orgearing
Average number of non-financial KPIs disclosed
2015 2014 2013 2012 2011 2010
Expansion/
growth
Environm
ental
Operational
Em
ployees
Reputation
Regulation
and
com
pliance
0
0.6
0.4
0.2
1.2
1.0
0.8
1.6
1.4
1.8
2.0

investor viewpoint
“Culture is indeed an important topic.
It is difficult for an investor to assess
the culture of the business. Reporting
in this area is very limited, mostly
confined to setting out the values of
the organisation. This is a first step;
investors need to know that these
values are embedded in the day to
day behaviours of all employees.
Companies need to report more on
how they achieve this, the ‘leadership
actions’ taken, and importantly the
monitoring and corrective actions to
encourage and allow employees to
act with integrity at all times.”
Businesses stay coy on culture
“One of the key roles for the board includes
establishing the culture, values and ethics of
the company. It is important that the board
sets the correct ‘tone from the top’. The
directors should lead by example and ensure
that good standards of behaviour permeate
throughout all levels of the organisation.”
(UK Corporate Governance Code, Preface,
paragraph 4)
Company culture may be easy to articulate in
conceptual terms, but it is much harder to define
and measure in practice. The FRC has highlighted
organisational culture and behaviour as a focus of
scrutiny for 2015. Having introduced references –
in the preface to the Code and in the associated risk
guidance – the regulator focuses on culture, values
and ethics in the boardroom. Further, it plans to
hold a consultation to assess how effective boards
are at establishing company culture and embedding
good corporate behaviour. A steering group has
been established and a report of its observations
is due to be published in 2016. The Guidance on
Board Effectiveness will be replaced with new
material that has culture at its heart. The FRC will
publish a report of their observations and activity,
identify best practice and, develop practical,
market-led ‘how to’ resources to help boards
across a broad range of sectors and industries take
effective action on culture.
Looking at the quality of reporting on culture
and values for the first time, we have studied the
quality of disclosure and see that almost 20% of
FTSE 350 companies provide useful insights in
this area. A further 26% make no reference to it.
Surprisingly, this figure includes 15% of the FTSE
100. The majority of companies (54%) make only
a passing reference to culture and values, giving the
impression that such matters are not considered
important contributors to effective governance.
DOES THE ANNUAL REPORT
ADDRESS CULTURE AND
VALUES? (%)
None
Basic
General
Good
Detailed
FTSE 350
26.3
15
31.6
16.3
2.9
2
3.3
23
13.2
28.2
28
28.3
26.3
32
23.6
FTSE 100
Mid 250
This year 22% of FTSE 350 chairmen
discuss culture and values in their
annual report, either in their primary
statement or within their introduction
to the corporate governance report.
Here we find a stark difference
between FTSE 100 companies and
the Mid 250, with 30% of FTSE
100 chairmen discussing culture,
compared with 18% for the Mid
250. Encouragingly, the number of
chairmen that mention culture and
values in their primary statement has
more than doubled, to nearly 13%.
This compares favourably with data
from our 2013 FTSE 350 Corporate
Governance Review, where only 5%
of chairmen gave culture comparable
levels of attention.

Sector differences on values’ value
Looking at culture reporting by sector provides further
insight. Consumer services and technology companies seem
to find such reporting particularly difficult (or unimportant),
since a third of businesses in these sectors make no reference
to culture at all. In contrast, healthcare companies provide
the greatest insights. The financial sector has been at the
centre of many high-profile governance scandals linked
to culture, however, its reporting does not yet reflect the
industry’s investment and efforts in this area.
Peter Drucker is attributed with saying that “culture eats
strategy for breakfast.” It follows that, if a company is to
successfully implement its strategy and create and retain
value for its shareholders, then the tone and behaviours
embraced by those at the top of the business will influence
and direct the actions of employees. A clear set of values
embraced by the leaders of a business, and underpinned
by a transparent reward and recognition structure, will
establish the foundation for an effective governance culture.
Of course, it is easier to set the values than to live them, as
many recent examples testify. Therefore it is essential that
an organisation spends time assessing what it stands for and
how it will measure whether this culture is being embraced
throughout the business. If that seems too difficult, it is
worth turning to the financial services sector, where the
Prudential Regulatory Authority (PRA) now formally
assesses such matters in the businesses it oversees.
0
10
20
30
40
50
60
70
80
90
100
Culture reporting by sector (%)
Basic
m
aterials
Consum
ergoods
Consum
erservices
Financials
Healthcare
Industrials
Oil&
GasTechnology
Telecom
m
unications
Utilities
22.7
17.2
11.6
25.7
50
18.5
7.7
14.3
25
59.1
55.2
55.1
44.6
42.9
53.8
84.7
63.6
85.7 62.5
18.2
27.6
33.3 29.7
7.1
27.7
7.7
36.4
12.5
None Some More

Limited CSR commitment
“To the extent necessary
for an understanding of the
development, performance or
position of the entity’s business,
the strategic report should include
information about: environmental
matters (including the impact
of the business of the entity on
the environment); the entity’s
employees; and social, community
and human rights issues.”
(Companies Act 2006, s414C (7) (b))
Prior to the strategic report regulations,
most companies only took their
corporate and social responsibility
(CSR) reporting seriously when
their customers or shareholders
emphasised it was important. Most
management teams believed the value
of such reporting would not justify
the expense. Somewhat surprisingly
there has been scant improvement in
this regard, despite the introduction of
the requirement for reporting on non-
financial reporting policies in relation
to the environment, employees, social
and community activities and human
rights. Both the requisite standard of
disclosures and evidence that CSR is
connected to wider strategy delivery
and, more importantly, management
remuneration, remain absent. If
companies are taking this seriously
(as many purport to be), then why
is there not greater evidence of such
commitment within the annual report?
In 2015 we introduced a new question
to explore this topic.
It is disappointing to record that
only 46% of companies have CSR
policies integrated into their business
models. More than half of the FTSE
350 seems merely to be paying lip
service and, for once, this proportion
remains constant regardless of the size
of the company.
The FTSE 350 demonstrates a
similar level of disclosures to last year
as to the environment, employees,
social and community activities and
human rights – both in content and
quality. Following the regulatory
requirement, however, FTSE 350
companies are paying more attention to
the correct reporting of greenhouse gas
emissions, with a rise from 76% last
year to 85%. Furthermore, there was
an important shift in the number of
companies disclosing the gender split
among the workforce. This year, 70%
complied with this recommendation
against only 48% in 2014.
None Some More
TO WHAT EXTENT DOES THE COMPANY EXPLAIN ENVIRONMENTAL MATTERS? (%)
2015 2014 2015 2014 2015 2014
65.761.233.638.50.70.3
TO WHAT EXTENT DOES THE COMPANY EXPLAIN EMPLOYEE MATTERS? (%)
2015 2014 2015 2014 2015 2014
26.426.51.31.3 72.2 72.3
TO WHAT EXTENT DOES THE COMPANY EXPLAIN SOCIAL, COMMUNITY AND HUMAN
RIGHTS ACTIVITIES? (%)
2015 2014 2015 2014 2015 2014
42.745.31.00.6 54.1 56.3

32.767.3
17.182.9
2015
2014
IS THE STRATEGIC REPORT SIGNED BY THE CHAIRMAN, A COMPANY
DIRECTOR OR THE COMPANY SECRETARY? (%)
Yes No
0
0
20
20
40
40
60
60
80
80
100
100
Adopting new reporting requirements takes time. This year’s
findings reflect the increasing effort being put into this area
of reporting; gender disclosures have vastly improved, as
has the reporting of greenhouse gas emissions. But for some
reason some of the simpler requirements still seem to be
letting some companies down – for example, appending the
correct signatory for the strategic report where only 17% of
companies fail to get this right.
“It is alarming to note that risk disclosures for
2015 remained identical for 24% of the FTSE
350 (more than 70 companies).”
Disclosing long-term viability
“Taking account of the company’s current position
and principal risks, the directors should explain
in the annual report how they have assessed the
prospects of the company, over what period they
have done so and why they consider that period to
be appropriate. The directors should state whether
they have a reasonable expectation that the company
will be able to continue in operation and meet its
liabilities as they fall due over the period of their
assessment, drawing attention to any qualifications
or assumptions as necessary.”
(UK Corporate Governance Code, C.2.2)
The provision for a long-term viability statement was
introduced in the 2014 Code and is applicable for year ends
closing after 30 September 2015. It requires companies to
state whether they believe they will be able to continue to
operate and meet their liabilities, taking into account their
current position and principal risks for a period extending
beyond 12 months. Companies should state over what
period they have made their viability assessment and why
they consider that period to be appropriate. The period
considered must be longer than 12 months and relate to the
business planning process and how business performance
is measured. We assessed company disclosures regarding
longer-term viability, as well as examining the few early
adopter viability statements published thus far.
Many companies seek to give some indications of
long-term viability; of those, 67 companies provide basic
discussion about the foreseeable future, without being
specific about the time period assessed. Only six companies
provide good disclosures which reference to such things
as: principal risks and how they may impact the business
model or liquidity; the undertaking of stress and sensitivity
analysis, and scenario testing.
Of these six companies, two add viability statements
after their risk management disclosure in the strategic report;
one company discloses at the beginning of the governance
report; and three companies (as well as those 67 companies
providing their basic comments on longer-term viability)
include this within the going concern statement in the audit
committee report.
As this report is published, a number of companies are
waiting to see how those companies with September year
ends have dealt with this reporting.

Toolkit for long-term viability statement
ELEMENTS/
CONTENT
THINGS TO CONSIDER REPORTING TIPS
Positioning in
annual report
Use safe harbour provision of the Companies Act 2006 by
including in or referencing from the strategic report
The viability statement should be reported separately from the
traditional accounting-based going concern statement
Time period The specific period should be significantly longer than 12
months and ideally match the duration of the long-term
planning cycle (current examples use three to five years)
It should also align with your stated strategy, investment
periods and business lifecycle
Explain why this period is appropriate
Agree the definition of ‘significant’ in the context of the
business
The timeframe should be relevant to your organisation; to
inform this, consider contract lengths and strategic planning
periods
Reassess the time period annually in light of developments
Methodology High-level insight into approach taken to develop the statement
Include details of people involved in the process
Modelling of four scenarios and stress testing for sensitivity to
all key variables
Identification of measures to improve forecasting performance
management
Viability statement should ultimately be owned by the board
Exclude matters that are unlikely to arise
Process may involve the finance director, company secretary,
financial controller, head of risk, head of business planning,
treasury manager, head of investor relations, the audit
committee
Meetings with major investors and analysts may help inform
the process
NEDs to contribute further external and strategic perspectives
Viability statement can be modelled and validated by internal
audit or external consultants
Key risks Cross-references or links to significant risks – especially
solvency and liquidity
Evaluation of existing risk management/external controls,
including the approach to quantifying risk impact and likelihood
Consider mitigating actions in the assessment
Avoid repeating risk disclosures while ensuring that risk is at
the heart of the viability statement
Avoid repeating risk disclosures while ensuring that risk is at
the heart of the viability statement
Business model
and other
considerations
Consider specific circumstances of the company
Viability statement should be informed by the business model,
budget, internal control system, and current position
Check that the conclusion aligns, as appropriate, with the
going concern statement
Board
sponsorship
The board should confirm whether it believes the assessment
is robust in order to reflect accountability to stakeholders
Sufficient evidence to support the assessment should be held
on file
Avoid generic statements not specific to the company

Toolkit for culture reporting
ELEMENTS/
CONTENT
Defining The board is responsible for setting the ‘tone from the top’,
defining the desired culture of the organisation
Values and standards of behaviour are an important influence
on culture and there are strong links between governance and
establishing a culture that supports long-term success
Incorporate personal commentary from the chairman on the
organisation’s approach to culture
Ensure the chief executive reflects the chairman’s views on
culture from an operational perspective
Clearly define your purpose, strategic objectives and set
of values
Values should be consistent throughout the report
Embedding Culture and behaviours must be embedded at every level of an
organisation using:
• training/communication which delivers the board’s message
• aligned rewards which incentivise desired behaviours
• aligned HR policies and performance appraisals
• culture at the heart of any risk management or internal
control system.
Link purpose, strategy, values, KPIs, business model, risks
and reward
Culture referred to in risk management system disclosures
Monitoring The board should seek to assure itself that:
• senior management is supportive of the culture
• values are well defined and understood
• judgments and behaviours at different levels of the firm are
in line with culture
• inappropriate behaviour is not accepted.
Link purpose, strategy, values, KPIs, business model, risks
and reward
Culture referred to in risk management system disclosures
“The majority of companies make only a passing reference to culture and values, giving the impression
that such matters are not considered important contributors to effective governance.”

Governance
Governance
FAST
FACTS
• The number of
companies complying
with all provisions of
the Code has decreased
to 57%
• 90% of the FTSE 350
comply with all but one
or two provisions of
the Code compared to
93.5% last year and
85% in 2013
• The highest area of
non-compliance relates
to board independence
(B.1.2). The Code
requires half the board
excluding the Chairman
to be independent non-
executive directors,
12.8% of the FTSE 350
do not comply with this
provision
• 12% of FTSE 350
chairmen personally
discuss culture in their
primary statements, up
from 5% in 2013
• 54% of companies
make only a passing
reference to culture and
values, despite the FRC’s
emphasis this year
Compliance with the Code
“The Code is not a rigid set of rules … It is recognised that an
alternative to following a provision may be justified in particular
circumstances if good governance can be achieved by other means.”
(UK Corporate Governance Code, Comply or Explain, paragraphs 2 and 3)
‘Comply or explain’ is an approach that covers much of the content of the Code.
This, together with its more than 50 provisions, sets out more than 110 instances
of what companies, boards, directors and others ‘should’ do. Yet there is no
requirement to fully comply with these provisions and companies can decide
against it, as long as a reasonable explanation is provided. It is interesting after
many years of the number of companies opting to fully comply with the Code
increasing, this year that trend has reversed. There was a higher number of new
entrants to the FTSE 350, which skewed the results2
but even after adjusting for
this, the trend was marginally down.
This year 57% of FTSE 350 companies were fully compliant with the Code.
Although this figure represents a drop in overall compliance compared to last
year’s level of 61%, the quality of explanations has improved. Almost 70% of
FTSE 350 companies choosing not to comply provide a good explanation for
their reasons, compared with 60% in 2014.
2
In 2015 our FTSE 350 sample included 312 companies; 100 FTSE 100 companies and 212 Mid 250 companies. In 2014 it included
303 companies; 99 FTSE 100 companies and 202 Mid 250 companies.
0
10
20
30
40
50
60
70
80
90
100
2015 2014 2013 2012 2011
13 15 17 14 16
30 23
26 35 34
57 61 57
51 50
Do they claim full compliance with the UK Corporate Governance Code?
Complies
Does not comply,
explains with more detail
Does not comply,
explains with some detail
Does not discuss compliance

Governance
investor viewpoint
“It is paramount for us, as long term investors, that the
governance framework and structures adopted by the
company benefit the business itself, helping the company
to deliver healthy, sustainable performance, while ensuring
appropriate protection of shareholder rights and taking
due account of the interests of all key stakeholders.
Non-compliance with some recommendations of the
governance code is not an issue when we understand
how the alternative approach delivers on the objective set
out above. In fact, we get more worried when a company
adopts a conventional governance model, but by doing so,
leaves critical stakeholders outside of the formal decision-
making process.”
New entrants fall at first compliance hurdle
Looking at the level of compliance among the Mid 250,
it is interesting to note that the scores were stable at 54%
in 2015 and 2014. However, there was a marked positive
trend among established companies which was diluted by
the weaker level of compliance among new entrants. The
levels of full compliance for the same 182 companies which
have been in the Mid 250 for the past two years, improved
by 4.4%. Of the 21 new entrants in the Mid 250, 20 were
recorded as non-compliant. This compares with two thirds
of the companies which exited the Mid 250 being in full
compliance with the Code. It should be noted that most of
these new entrants had recently undergone an initial public
offering (IPO) and perhaps surprisingly, were seemingly still
developing their governance arrangements.
Do companies claim full compliance with the UK Corporate
Governance Code? (%)
2015 2014
FTSE 350 57.1 60.6
FTSE 100 64.0 74.0
Mid 250 53.8 54.1
Full compliance rates down
For the first time in four years, the FTSE 100 saw a drop in
those claiming full compliance, down to 64%. The FTSE 100
had two new entrants this year, one of which claimed full
compliance with the Code. Of the 98 FTSE 100 companies
that were present in both 2014 and 2015, 17 changed their
compliance status in 2015. Just four companies moved to
full compliance from either non-compliance or part-year
compliance status, while 11 switched from compliance to
non-compliance and two shifted from compliance to part-
year compliance.
Reasons for non-compliance
Overall there was a noticeable increase in non-compliance
with provision B.1.2 within FTSE 350, requiring at least half
of the board to be made up of independent NEDs. Senior
independent director (SID) appointments are on the rise,
with 2% more FTSE 350 companies claiming compliance
with provision A.4.1, that the board should appoint a SID.
Somewhat surprisingly, compliance with the provision E.1.1,
requiring meetings with shareholders, declined by a similar
amount. More companies explained in their annual reports
that their chairmen and SIDs were available for meetings
and discussions with shareholders but that they did not take
place as no meetings were requested by shareholders. The
need for greater shareholder engagement remains a concern
of the FRC.

Areas companies list as non-compliant
Code
provision
Requirement % of non-
compliant
FTSE 350
companies
% of all FTSE 350
2015 2015 2014
B.1.2 At least half the board should
be independent non-executive
directors
30.1 12.8 9.8
D.2.1 Remuneration committee
membership criteria
18.8 8 9.1
C.3.1 Audit committee membership
criteria
18.8 8 7.5
B.6.2 The board evaluation should be
externally facilitated at least every
three years
17.3 7.4 5.5
C.3.7 FTSE 350 companies should put
the external audit contract out to
tender at least every ten years
13.5 5.8 4.6
A.3.1 The chairman should be
independent on appointment
11.3 4.8 3.3
A.2.1 The roles of chairman and chief
executive should not be held by
the same individual
10.5 4.5 3.6
B.2.1 Nomination committee
membership criteria
10.5 4.5 3.6
E.1.1 The chairman should discuss
governance and strategy with
major shareholders; the senior
independent director should attend
a sufficient number of meetings
with a range of major shareholders
9.0 3.8 1.6
A.4.1 The board should appoint a senior
independent director
3.0 1.3 3.3
On further investigation we found a
notable fall in compliance within the
FTSE 100. Eight companies moved
to non-compliance this year having
previously complied with the Code
in full. The most common reason for
non-compliance within this group was
for not tendering the external audit
contract. Companies justify this by
saying they are waiting to see what the
implementation of the EU Directive
and Regulation on audit will bring,
after it becomes effective for financial
years beginning on or after 17 June
2016 (the directive’s provisions include
mandatory audit firm rotation and
significant restrictions on non-audit
services). The other main reasons
for non-compliance involve one or
more of the following: the number of
independent non-executive directors
(NEDs), the independence of the
chairman, the division of the roles
of chairman and chief executive, and
having board performance externally
evaluated every three years.
“This year 57% of FTSE 350 companies were
fully compliant with the Code. Although
this figure represents a drop, from 61%, the
quality of explanations has improved.”
Governance

IMPACT OF NEW ENTRANTS ON KEY AREAS OF GOVERNANCE (%)*
Outputs and
actions arising
from evaluation
disclosures
Disclosures on KPIs
Future developments,
performance and
position disclosures
Shareholder
engagement
Risk management
disclosures
Internal control
disclosures
Description of the
remuneration policy
FTSE 350 Without new
entrants
New
entrants
34.6
45.2
40.7
55.1
69.9
61.9
36.7
46.7
41.6
56.8
71.7
62.7
8.7
26.1
34.8
30.4
47.8
52.2
*based on the high quality explanations only
92.6 93.8 78.3
Governance
New entrant influx skews results
2015 saw a higher than usual number of new
entrants to the FTSE 350. As mentioned
above, this skewed the results of our annual
benchmarking exercise overall. Of the 23 new
entrants, two joined the FTSE 100 and the
remaining 21 companies joined the Mid 250.
Only one of the two new joiners to the FTSE 100
does not comply with the Code, while of the 21
new entrants to the Mid 250, 20 companies do
not comply.
A closer look at the impact of the dilutory
effect of the 23 new entrants raises some
questions. Why is it that, for example:
• 48% of new entrants are not able to present a
board with sufficient independent NEDs
• 36% make no reference to having a board
effectiveness review of any sort
• only two companies claim to have undertaken an
externally facilitated review
• only two companies gave any real insight into
the output from their review of the board’s
effectiveness?
Why are companies being allowed to come into
the FTSE 350 without addressing what might be
considered to be highly desirable to investors,
namely: the right balance of experience and
authority on the board; and an external appraisal
of the board’s capability and effectiveness. Not
to mention other aspects such as informative risk
disclosures and clear, reasonable KPIs against
which to assess future performance? Surely it’s
in everyone’s interests to address such important
matters in preparation for an IPO rather than
after the investment is committed?
“Looking at the new entrants there are many varied aspects of governance practice and its reporting
where smaller companies, in particular, fall short of expectations.”

Personal accountability
continues to rise
“Chairmen are encouraged
to report personally in their
annual statements how the
principles relating to the role and
effectiveness of the board …
have been applied.”
(UK Corporate Governance Code,
Preface, paragraph 7)
Following the 2012 Code changes
relating to the increased transparency
of the board and its duties, the trend
of increasing personal accountability
of directors continues. The number
of corporate governance reports
providing informative descriptions of
board duties increased significantly
compared to last year (2015: 71%,
2014: 57%). Most noticeable is the
greater level of insight into, and
explanations of, the work and focus
of the board. In the FTSE 100, 89%
of companies provide good insights
(2014: 75%), while the Mid 250 ratio
increased from 48% to 62%.
The number of chairmen discussing
governance in their primary statement
remains constant this year at 85%.
In line with last year’s trend, the
number of chairmen giving personal
introductions to the corporate
governance report increased, to 83%
(2014: 77%). Two thirds of these
chairmen give informative descriptions
of governance arrangements while the
remainder appear less engaged.
Personal accountability has been
growing over the past five years and
it is not surprising that remuneration
committee chairmen have been
showing the way, no doubt encouraged
by institutional interest. More recently
though, and perhaps reflecting their
higher responsibility, audit committee
chairmen’s accountability has also
increased. However, it is only in the
past three years that there has been
substantial movement in nomination
committee accountability. Nearly all
remuneration committees’ statements
(96%) open with a personal statement
from the chairman. For audit
committees 66% (2014: 56%) now
make individual statements whereas
those nomination committee chairmen
who hold themselves out to account
remain in the minority, with 52% of
reports having personal commentary
albeit a significant improvement
on 2014 with 35%. Remuneration
committees were in a comparable place
four years ago.
“Following the 2012 Code changes relating to the increased transparency of the board and its duties,
the trend of increasing personal accountability of directors continues.”
0
20
10
40
30
60
50
2012 2013 2014 2015
90
80
70
100
Personal commentary from chairman (%)
Remuneration committee
Governance report
Audit committee
Nomination committee
Governance

FAST
FACTS
• 84.6% of chairmen
provide personal
comment on governance
in their primary
statement
• The average number
of board meetings has
increased slightly to
8.4 per year. 19 boards
have met more than 12
times during the year
compared to 12 boards
in 2014
• 82% of FTSE 100
chairmen and 47.6%
of FTSE 250 chairmen
state that they discuss
strategy and governance
with major shareholders
• Only 15 companies
make reference to
communications with
debtholders and only
one gives a good
description of what
this entails
• The number of board
and board committee
meetings held during the
year rose very slightly in
2015. Only remuneration
committees met slightly
less often
Governance
Shareholder relations
“There should be a dialogue with
shareholders based on the mutual
understanding of objectives. The
board as a whole has responsibility
for ensuring that a satisfactory
dialogue with shareholders
takes place.”
(UK Corporate Governance Code,
main principle E.1)
For the past two years, all companies
have provided some insight into the
steps taken to understand the views
of shareholders. More than half of
companies give good or detailed
explanations (2015: 55%, 2014: 64%).
However, this is largely accounted for
by FTSE 250 companies, which the
impact of new entrants only partly
explains. Forty five per cent of FTSE
350 companies give some basic insight
that is mostly generic.
This raises questions about the
general level of engagement and
challenge that is being received,
or rather not being received, from
investors. Does it reflect the anecdotal
evidence that it is difficult for smaller
companies to get real engagement with
their shareholders? If so, this does
go some way to explaining the lower
priority given to their activities in this
area – but still, companies should not
be complacent.
The issue is clearly a concern for
the FRC, which has made specific
reference to the need to encourage
greater shareholder engagement.
In 2014 a new requirement was
introduced whereby companies
should explain when publishing
general meeting results how they
intend to engage with shareholders
when a significant percentage of them
have voted against any resolution.
The FRC has also made changes
to the Code involving shareholder
engagement in the triennial approval
of the remuneration policy. The FRC
will continue to focus on improving
implementation of the Stewardship
Code, attempting to nudge
shareholders even more in the right
direction.
The same requirement for greater
engagement is placed on boards in
relation to their debt holders; however
less than 5% of companies make any
effort to discuss this in their annual
reports.

investor viewpoint
“Sadly there is often a poor
understanding of the engagement
purpose and process on both sides.
For engagement to work there
needs to be clarity of engagement
objectives, a clear agenda and for the
right participants to be involved in the
discussions at the right time.”
None Some More
0
20
40
60
80
2015 2015 20152014 2014 20142013 2013 2013
100
00 0 0 0 00 0.50.3
35.9
44.9
26.5
35.0
25.0
11.2
56.3
54.2
64.155.1 73.2 65.075.0 88.8 63.745.8 65.5
34.5
TO WHAT DEGREE DOES THE BOARD DEMONSTRATE THE STEPS TAKEN TO UNDERSTAND
THE VIEWS OF MAJOR SHAREHOLDERS? (%)
TO WHAT DEGREE DOES THE BOARD DEMONSTRATE THE STEPS TAKEN TO UNDERSTAND
THE VIEWS OF MAJOR DEBT HOLDERS? (%)
None Some More
95.2
4.5 0.3
95.4
4 0.7
97
3
Governance

FAST
FACTS
• Ten companies
combine the role of
CEO and chairman, an
increase on last year’s
six companies. Only
two of these described
it as a temporary
measure. A further
17 companies have
executive chairmen
• 25% of companies
have at least one
board member who
is not considered to
be independent. 44
companies consider
one or more NEDs to
be independent despite
having been on the
board for more than
nine years
• 11 nomination
committees have not
met during the year,
four of which appointed
new NEDs during
this time
• 98 per cent of
companies have at
least one member with
accounting experience,
while experience on
boards in areas of
technology and law is
very low
“A separate section of the annual report should describe the work of the
nomination committee, including the process it has used in relation to
board appointments.”
(UK Corporate Governance Code, B.2.4)
The requirement for half the board to consist of independent NEDs has been in place for
more than a decade, following its introduction by Derek Higgs in 20033
. And yet once again
this provision (B.1.2) continues to have the highest percentage of non-compliance. This is
unfortunate, as it has a knock-on effect on the composition of the board and committees as
well as on succession planning and on aligning the board to the future needs of the business.
There is a small improvement in the number of nomination committees disclosing
information about their duties and work during the year: 48% provide good and detailed
insights whereas in 2014 only 42% did so. We saw better quality reporting overall in
nomination committee reports; however, this committee continues to meet least often
(average number of meetings, 3.3; audit committees, 4.7; remuneration committees, 4.8).
Eleven companies’ nomination committees did not meet at all during the year. All of
these were FTSE 250 companies, with five from the financial services industry. One of the
11 companies did not have a nominations committee; five had committees that simply did
not meet (despite four of the five appointing new non-executive directors during the year);
and the remaining five were newly listed and so in the process of forming nomination
committees for the first time.
3
Review of the role and effectiveness of non-executive directors, Derek Higgs, January 2003, UK Department for Business, Enterprise
and Regulatory Reform.
IS THERE A DESCRIPTION OF THE WORK OF THE NOMINATION COMMITTEE, INCLUDING THE PROCESS IT
USES IN RELATION TO BOARD APPOINTMENTS?
None Some More
0
20
40
60
80
2015 2015 20152014 2014 2014
100
0 0 0 0 0.50.3
51.6 57.4
36.0
61.6 59.0
48.4 42.2 64.0 38.4 41.0 44.1
55.4

4
Women on boards, Lord Davies of Abersoch, February 2011, UK Department for Business, Innovation & Skills.
5
Grant Thornton global governance report 2015, Corporate Governance: the tone from the top.
6
Grant Thornton study of companies in the UK, US and India, Women in business: the value of diversity.
7
These companies are included in ‘Basic’ description group.
investor viewpoint
“We expect companies to try and demonstrate that they
have a balanced board in place with directors having a
diversity of backgrounds, experience (in terms of industry,
geography and function), skills, gender, age, tenure and
personalities. There is a lot of research suggesting that
there is still insufficient challenge in boardroom discussions
and therefore there needs to be an effective and credible
team in place. Advisory boards can provide a useful
mechanism to enhance the board’s and management’s
access to specialist knowledge and expertise without
compromising the overall effectiveness of the board.”
Diversity
“The board and its committees should have
the appropriate balance of skills, experience,
independence and knowledge of the company to
enable them to discharge their respective duties
and responsibilities effectively.”
(UK Corporate Governance Code, main principle B.1)
Traditionally, diversity has been assessed in our
benchmarking, using age as a proxy for experience. This
year we found little change: FTSE 350 chairmen continue
to be very seasoned board members (average age 63 years)
with NEDs being somewhat younger at 59 and executive
directors younger still at 53. Although directors are younger
in the Mid 250 than the FTSE 100, the differential is usually
no more than a year or two. As in prior years FTSE 350
companies are more concerned with bringing experienced
members to the board rather than the younger perspective. Companies reach Davies’ gender target
Since the publication of the Davies Report in 20114
the
proportion of women on boards in the FTSE 100 has
doubled. In summer 2015 the UK’s top companies reached
the report’s target of having 25% of board positions filled by
women. Globally, however, the figures are not so advanced,
with just 16% of board roles being held by women5
. There
has been little change at executive and chairman level, where
there are only four female chairs in the FTSE 100 and seven
in the Mid 250. The focus for campaigners is now on the
promotion of the executive pipeline. Research shows that
companies perform better when they have at least one
female executive on the board6
. Yet, only one in four FTSE
100 companies has a female executive on its board and just
one in eight of the Mid 250.
This heightened focus has also led to an improvement
in the quality of reporting on gender diversity. There
is a 7% increase in FTSE 100 companies that provide
detailed explanations of their gender diversity policy
and the considerations given to gender during the board
appointment process. Six of our top cadre of companies,
however, still make no mention of gender diversity at all.
In the Mid 250, 7.1% or 15 companies make no reference
to gender diversity and there was a 9% drop in the quality
of detailed explanations this year. Some companies, rather
lamely, state that they do not have a gender diversity policy
and that appointment of board members is based on other
criteria7
.
Average age
of chairman
Average age
of NEDs
Average age of
executive directors
EXPERIENCE OF THE BOARD AND ITS COMMITTEES 2015 (years)
63.4
FTSE
350
59.3
FTSE
350
52.8
FTSE
350
64.8
FTSE
100
59.9
FTSE
100
53.8
FTSE
100
62.7
Mid
250
58.8
Mid
250
52.2
Mid
250

How much explanation is there of the company’s policy on gender
diversity in the boardroom? (%)
FTSE 350
2015 6.7 25.6 39.1 20.2 8.3
2014 20.8 43.2 6.3 22.8 6.9

*This figure includes companies that state they do not have a gender diversity policy and
that they select board members candidates on other criteria.
While gender is an important aspect of the diversity debate,
cultural diversity is beginning to play a greater part. This
is the first year that the majority of FTSE 350 companies
have addressed the executive’s diversity in its wider sense
in their annual reports: 76% of the FTSE 100 and 44% of
the Mid 250 discuss other aspects of boardroom diversity.
Despite this wider debate and recognition of the need for a
broader concept of diversity, 46% of companies, including
24 in the FTSE 100, still make no reference to the wider
characteristics that might add value to their business and
how they seek to benefit from them.
Within the FTSE 350, 67% provide basic descriptions
of the relevant skills and experience of directors with only
32% providing details of directors’ functional expertise,
such as a track record in IT or law, and how this adds value
to the board. This year, 98% of companies have at least one
board member with accounting or financial experience.
Furthermore 86% of FTSE 350 companies see great
advantage in hiring board members with prior London Main
Market-listed company board experience. International
work experience is also highly regarded, as is expertise in
technology, law and HR. However it is surprising, given
our current technological evolution and dependency – and
its predicted acceleration – that only just over a quarter of
companies have IT skills represented on the board.
Board induction and training
“The chairman should ensure that the directors
continually update their skills and the knowledge
and familiarity with the company required to
fulfil their role both on the board and on board
committees.”
(UK Corporate Governance Code, supporting principle B.4)
There continues to be little change in reporting on board
induction and training. Around one third of FTSE 350
companies give detailed insight, just under two thirds offer
some basic commentary, while 3% fail to comment at all.
Companies that do provide detailed discussion mention
the specific topics covered in training, and outline visits to
factories or offices in other countries to learn about specific
operations or address needs identified in a board evaluation.
Yes No
58.441.6
45.554.5
2015
FTSE 350
2014
0
0
20
20
40
40
60
60
80
80
100
100
38.461.6
2476
FTSE 100
2015
2014
0
0
20
20
40
40
60
60
80
80
100
100
68.131.9
55.744.3
FTSE 250
2015
2014
0
0
20
20
40
40
60
60
80
80
100
100
DO COMPANIES DISCUSS OTHER ASPECTS OF BOARDROOM
DIVERSITY? (%)
“In summer 2015 the UK’s top companies
reached the Davies Report’s target of having
25% of board positions filled by women.”

Toolkit for nomination committee report
ELEMENTS/
CONTENT
Chairman’s
introduction
A personal introduction promotes ownership and accountability
in the eyes of the reader
Include a high-level overview of key activities of the committee
Commentary should relate back to strategy and refer to any
key events or changes during the year
Be clear on how actions align to company needs and strategy,
and the interests of shareholders
The nomination committee chairman should introduce a
separate section within the annual report
Commentary should be personalised and specific to the
company
Composition The majority of members of the nomination committee should
be independent NEDs
The board chairman or an independent NED should chair the
committee
Information on where the committee’s terms of reference are
available can be cross-referenced to the company’s website
Include reference to any conflict of interest
Committee’s
meetings and
allocation of
time
State key responsibilities of the committee and its interaction
with the board
Provide details of the number of meetings and member
attendance
Charts and tables are an effective way to show members’
attendance of committee meetings
Clear disclosures often include a timeline of key activities
during the year
Diversity Explain the board’s policy on diversity, which may include:
gender, ethnicity, age, professional background, culture,
personal attitudes
Explain how the balance of skills, experience, independence
and knowledge on the board was evaluated and what
conclusions were drawn
Discuss any measurable objectives/targets in relation to the
policy on diversity and the progress made
Refer to diversity as a factor in succession planning and link
perceived needs to strategy
Cross-reference to board evaluation
Include reference to the Davies Report target
Diversity should be considered more widely than just gender to
include nationality, skills balance and personality traits
Use infographics to clearly map the skills, experience and
diversity of board members in line with strategic needs
Board
appointments/
succession
A description of the board appointment process including
whether or not an external search consultancy/open
advertising was used
High-level criteria used to assess candidates
Explain how the process promotes effective governance and/
or supports the delivery of company strategy
Discuss any re-appointments of directors
Review any director’s term beyond six years
Assessment of directors’ capability meeting the future ongoing
needs of the company
Board appointments process and diversity policy discussion
should appear in the nomination committee report rather than
the corporate governance report, as required by the UK Code
Mention culture within the selection process
Some companies separate short term and long term
succession planning
Specify where letters of appointment are available for
inspection

Other issues: board composition
“At least half the board should comprise independent
non-executive directors.”
Board size remains consistent this year, with the ratio of
NEDs to executive directors increasing slightly. Board
composition stays in line with last year, with an average
of 9.4 members: a chairman, 5.9 NEDs and 2.6 executive
directors. Eighty nine per cent (2014: 93%) of companies
have boards that consist of a majority of independent NEDs,
excluding the chairman.
Board composition
Executive
directors
NEDs Total board size
2015 2014 2015 2014 2015 2014
FTSE 350 2.5 2.8 5.9 5.7 9.4 9.5
FTSE 100 2.7 3.1 7.5 7.3 11.1 11.4
FTSE 250 2.5 2.6 5.1 4.9 8.6 8.6
Is at least half of the board, excluding the chairman, comprised of
NEDs determined by the board to be independent? (%)
2015 2014 2013
FTSE 350 88.5 93.1 85.9
FTSE 100 94.0 96.0 95.9
FTSE 250 85.8 91.7 81.0
This year 51 companies stated that they considered non-
executive members of their board to be independent despite
not complying with the criteria outlined in B.1.1 of the
Code. Of these, 44 companies (2014: 46 companies) had
directors who had been on the board for more than nine
years. Overall, 88% gave some insight as to why they
considered the director to still be independent however, only
four companies actually recognised non-compliance with
B.1.1 in their compliance statement. Explanations varied, but
better examples explain:
• the rationale behind why the director is important to the
board (eg skills, experience)
• why the director is believed to be independent
• how the board has mitigated any potential risk.
WHY ARE THE NEDS NOT CONSIDERED INDEPENDENT? (%)
Employee within last three years
Family ties
Significant shareholder
On the board for more than nine years
Other
Not disclosed
2015
6.3
6.3 8.2
4.9
50.8
27.9
15.2
16.4
12.7 14.8
64.6
15.2
2014
Independence
“The board should determine whether the director is
independent in character and judgment and whether
there are relationships or circumstances which
are likely to affect, or could appear to affect, the
director’s judgment.”
There was a 4% fall in the overall levels of board
independence in 2015 for the FTSE 350 – this is mainly a
knock-on effect from the smaller companies in the index.
Twenty seven companies have an executive chairman
(2014: 25), of these, ten have a combined chief executive
and chairman (an increase on last year’s six). Only four
companies with a joint chief executive and chairman (40%)
describe this as a temporary measure, with the majority
choosing not to ensure clear division between strategic and
operational decision making, going against best practice.
investor viewpoint
“Generally speaking we need to see companies setting out
all the reasons as to why non-independent, non-executive
directors are deemed important for the board and how any
potential arising risk has been mitigated. Major shareholders
are welcome on boards if they are willing to actively
participate in the stewardship of the company and provided
an appropriate balance of independence is maintained.
Boards do not need ‘observers’ they need ‘directors’.”
“This is the first year that the majority of
FTSE 350 companies have addressed the
executive’s diversity in its wider sense in their
annual reports.”

Seventy nine companies stated that they had non-
independent NEDs on their board, 51 of these are non-
independent as they are significant shareholders. This shows
a significant increase on last year (2014: 51%). New entrants
to the FTSE 350 have contributed to this increase with 15
of the 23 new companies having significant shareholders on
their boards.
Board evaluations
“The board should state in the annual report how
performance evaluation of the board, its committees
and its individual directors has been conducted.”
The Code requirement for triennial, externally facilitated
board evaluation has been adopted by most companies.
This year 11% more FTSE 350 companies provide a good
description of how they critically examine board, committee
and director performance, and how their evaluation process
is organised. While all companies seem to have embraced
the process in principle, communicating the issues resulting
from it has been a tougher hurdle. FTSE 100 companies lead
the way by detailing not only the process itself but also how
critical areas will be addressed and how board weaknesses
from previous evaluations are tackled. Good quality
descriptions of the outputs and actions arising from the
board evaluations of FTSE 100 companies increased to 46%
versus 25% in 2014, while the number of companies giving
no explanation or a one-sentence statement that “the board
is operating effectively” decreased by 11%.
Nineteen of the 23 new entrants gave some insight into
how they evaluated their board during the year, only two
of these had facilitated evaluations during the year and
only two gave any real insight into outputs and subsequent
actions from the process. A greater insight and focus on the
quality and skills of the board might be achieved from an
externally facilitated review and this could be considered
a prerequisite for a company seeking to attract external
investment on a public market.
“Good quality descriptions of the outputs and
actions arising from the board evaluations of
FTSE 100 companies increased to 46%, versus
25% in 2014.”
To what extent are the outputs and actions arising from the board
evaluation disclosed? (%)
FTSE 350
2015 12.2 27.2 26.0 25.3 9.3
2014 13.5 32.6 28.6 17.8 7.6
FTSE 100
2015 7.0 21.0 26.0 32.0 14.0
2014 13.0 36.0 26.0 17.0 8.0
FTSE 250
2015 14.6 30.2 25.9 22.2 7.1
2014 13.7 30.9 29.9 18.1 7.4
Although we are now seeing around a third of companies
undertaking an external review of their board in line with
the guidance (B.2.1), there has also been a small increase in
those who still choose not to comply. Often reasons given
relate to recent changes of the chairman or chief executive,
where the company believes it needs more time before
seeking external input and assessment.
This year 41 independent evaluators of FTSE 350
companies are named (38 in 2014). Three of these
consultants undertook 48 evaluations (2014: 43), the
remaining 38 evaluators providing on average two each.

Toolkit for board duties and operations
ELEMENTS/
CONTENT
Powers and
responsibilities
of the board
An outline of powers and authorities retained by the board, and
those delegated to management
Key tasks/matters considered by the board during the year
Main priorities for the coming year
Number of meetings and attendance record of each director
Explanation of the company’s reporting lines and monitoring
structures, and how they are embedded within the company,
eg the committee structure and how information filters down
from top-level management and the board
Charts and tables are an effective way to demonstrate the
board’s time allocation to specific areas/topics
Tables are also an effective way to show board members’
attendance of board and committee meetings
It may be useful to discuss board responsibility for risk
management and internal control in a separate subsection
Board
composition
Identify the chairman, all executive directors, NEDs and SIDs
Explain how NEDs’ contribution to the board is maximised
State whether at least half the board, excluding the chairman,
comprise NEDs determined by the board to be independent
Disclose specifics around independence in terms of character
and judgment and acknowledge, where relevant, any issues
that may affect independence
Address the issue of potential conflict of interests
If the board deems that a director is independent despite
not meeting the criteria set by the Code, they should explain
which criteria the director does not meet and why they are,
nevertheless, considered independent
Explain how any potential risks are mitigated (eg the director
does not participate in certain votes/discussions)
Include infographics on executive directors and NEDs, tenure,
gender split, etc
Differentiation
of roles
Company-specific discussion/differentiation of the roles and
responsibilities of the executive directors and NEDs including
decision-making powers
Company-specific information about differentiation between
roles and responsibilities of chairman, chief executive and SIDs
Table format may be useful
Skills and
experience
Outline board members’ education, skills, experience,
qualifications, and prior and current appointments, and
demonstrate how these bring value, drive strategic delivery
and challenge the board
Assess the current range of experience within the board and
identify if there are any skills gaps to address present or future
needs
Provide tables or infographics
Information on directors should be relevant and
understandable for the reader
No need to include full CVs
Pictures of board members convey an impression of personal
accountability

ELEMENTS/
CONTENT
Induction,
training and
development
Outline what is included in the director’s induction process and
what form this takes (training, site visits, briefings, shareholder
meetings, etc)
Specify how ongoing training needs are identified, and indicate
what training has been provided during the year and/or will be
provided next year
Explain how the training links back to the strategy and/or
business model
Provide a case study
Evaluation The evaluation should cover the:
• relevance of the mix of skills, experience, knowledge and
diversity on the board, in the context of the recent and
future challenges facing the company
• working relationship between key board members,
particularly chairman/chief executive; chairman/SID;
chairman/company secretary; and executive directors/
NEDs
• effectiveness of individual NEDs and executive directors
• effectiveness of board committees, and how they are
connected with the main board
• outcome of the performance evaluation of the chairman
conducted by the NEDs and led by a SID.
Provide the name and details of an independent organisation
if board evaluation was externally facilitated; or provide the
reasons why the Code requirement for triennial external
evaluation was not complied with
Description should explain at a high level the mechanisms/
approach (eg surveys, face-to-face interviews, external
facilitation) and criteria used
Set out the key areas for improvement and/or areas of
excellence. Refer to progress made, actions planned and
timescales
Tables are an effective way to show outcomes of board
evaluations, actions taken or planned and their timeline
Do not make a general statement that the board operates
effectively. Be specific about the outcomes and subsequent
actions
Compare last year’s outcomes with actions taken during the
year to address any shortcomings

Audit committee
FAST
FACTS
• 72.4% of the FTSE 350
provide an effective
description of the audit
committee’s assessment
and challenge of the
financial statements
• Over two thirds of
reports give a detailed
description of risk
management processes
and 62% provide strong
disclosures on internal
controls. However,
only 21% give an
informative explanation
as to how the audit
committee assessed the
effectiveness of internal
controls
• 50% of FTSE 350
companies commit to
undertaking an audit
tender at least once
every ten years
• 91% of FTSE 350
companies have an
internal audit function
• For the largest 30
companies in the FTSE
350, non-audit fees
represent an average of
33% of audit fees, this is
an increase on last year
where they represented
28% of audit fees
• The largest non-audit fee
is £13.9m. Last year it
was £8.5m. The highest
as a percentage of audit
fees was 867%
“A separate section of the annual report should describe the work of the
committee in discharging its responsibilities. The report should include … if the
auditor provides non-audit services, an explanation of how auditor objectivity
and independence is safeguarded.”
The audit committee’s role and responsibilities have grown significantly in recent years,
as both the business environment and the shareholders’ and regulator’s expectations have
changed. Calls for greater transparency across the board and its committees, bribery and
corruption legislation, an ever-growing amount of reported information, a board looking
for comfort that it is fair, balanced and understandable, and most recently a renewed focus
on risk management and control, future viability statements and auditor rotation, have
all put greater pressure on audit committee time. It is no surprise, therefore, that certain
institutional investors are requesting meetings directly with audit committee chairmen so
they can explain first-hand the committee’s remit. And yet, despite all these demands, the
average number of audit committee meetings has remained the same.
Our analysis shows a continuing decline in the level of non-audit work awarded to
auditors among the largest companies, amounting to £1.52m for the FTSE 100, compared
with £1.7m in 2014. This represents 31% of the audit fee, a significant decrease compared
with previous years (2014: 37%; 2010: 54%). The very largest companies, the FTSE 30, were
paid non-audit fees of £3.4m in 2015; the FTSE 201-350 were paid a comparably high level of
non-audit fees at 83%, mostly IPO-related or attributable to some sizeable M&A activities
from new entrants. The actual amount paid to the smaller companies; FTSE 201 to 350 was
of course much less at £350,000.
Average non-audit fees as % of audit fees
2015 2014 2010
FTSE 100 30.5 37 54
FTSE 101-200 61.6* 49 80
FTSE 201-350 83.3 91 88
*This is due to Auto Trader which incurred over 800% of non-audit fees and is distorting the average; excluding this, the
figure would be 54%.
Average non-audit fees and audit fees (£m)
2015 2014 2010
Audit Non-audit Audit Non-audit Audit Non-audit
FTSE 100 5.88 1.52 6.24 1.7 6.34 2.48
FTSE 101-200 1.24 0.59 1.11 0.52 1.14 0.66
FTSE 201-350 0.62 0.35 0.43 0.31 0.51 0.39

EU directive heralds change
“The audit committee should have primary
responsibility for making a recommendation on the
appointment, reappointment and removal of the
external auditors. FTSE 350 companies should put
the external audit contract out to tender at least
every ten years.”
This year, the EU Regulation and Directive on audit will
be formally implemented, covering non-audit services and
the external auditor tendering process for companies with
financial periods beginning on or after 17 June 2016. As a
result, some provisions will be removed from the Code and
become a legal requirement. The FRC launched a related
consultation paper in 20149
and it is probable that the
requirements for mandatory 10-year audit re-tendering,
20-year audit firm rotation and the prohibition of certain
non-audit services, as well as the introduction of an upper
limit of 70% for non-audit fees, will be enacted. Many
companies are having to explore new relationships for some
of the services they have traditionally relied upon their
auditors to provide. This is likely to have greater impact on
the smaller companies in the FTSE 350.
In 2008 just 2% of FTSE 350 companies gave good
and detailed disclosures on external auditor appointments;
this year the proportion reached over 50%. Improvements
include better clarity on company policy and more detailed
insight into the processes by which auditor effectiveness and
independence are assessed.
Despite this positive trend, fewer companies state their
commitment to putting their external audit out to tender
every 10 years, with 6% of the FTSE 350 stating non-
compliance with the relevant principle (C.3.7) compared to
5% last year. Within the FTSE 350, 34% of organisations
have not rotated their auditor for more than ten years,
while a further 26% fail to state when their auditor was
appointed or rotated. This seems to indicate that their audit
appointment and rotation happened some time ago and that
this could be an area of impending change. However, it is
difficult to track developments with any certainty unless
a company makes an explicit disclosure in this regard. We
expect to see this area of reporting improve in next year’s
review.
investor viewpoint
“The new format Audit Committee report has been
welcomed by investors. The reports are more insightful
than before and we are learning how to read them.
Investors need to understand the governance approach and
information flows to the senior management and board as
well as why the board considers the internal controls to be
effective. Although full transition to the new rules for auditor
rotation will take some time, it is clear that the committees
are, generally speaking, more informed, asking more
questions and looking for more. Tax advice remains an area
of concern and looking ahead, engagement and a broader
stewardship dialogue will follow on from these reports when
explanations are not sufficient and actions fall short of
expectations.”
9
Consultation: Auditing and ethical standards, FRC, December 2014.
HOW MUCH INFORMATION DOES THE AUDIT COMMITTEE REPORT
PROVIDE ON HOW IT REACHED ITS RECOMMENDATION TO THE
BOARD ON THE APPOINTMENT, REAPPOINTMENT OR REMOVAL
OF THE EXTERNAL AUDITORS? (%)
1.3 9.3 2
15.5
37.2
27.1
8.6
46.9
38.1
14.1
2015 2014
Audit committee

“Risk and internal controls have become a
much larger part of an audit committee’s
reporting remit.”
During the year, 41 companies put their external audit out
to tender.
Risk management, mitigation and
internal controls
“The board should maintain a sound risk
management and internal control systems.”
(UK Corporate Governance Code, main principle C.2)
Risk and internal controls have become a much larger part
of an audit committee’s reporting remit. In September 2014
the FRC published Guidance on risk management, internal
control and related financial and business reporting. This
updated the Turnbull guidance as well as incorporating the
recommendations from the Sharman Inquiry into going
concern and liquidity risk.
For 2015, our benchmarking found that 70% of the
FTSE 350 provides good or detailed descriptions of risk
management, broadly in line with the previous year (71%).
Disappointingly, the score for detailed disclosures slipped
this year, from 30% to 22%. However, the balance was
taken up by the good disclosures category.
The FTSE 100 continues to set the standard, with improving
disclosures from 84% of firms (2014: 69%). In the Mid 250
the story is more mixed, with some improvement from those
who have been there for more than a year, and new entrants
diluting the overall effect.
Internal controls disclosures improved this year with
62% of companies achieving a good standard, compared to
60% in 2014.
When assessing the effectiveness of internal controls, our
research found that only 4% of FTSE 350 companies fail to
provide any information at all. This is an improvement on
2014 when it was almost double this level.
58.741.3
5050
2015
FTSE 350
2014
0
0
20
20
40
40
60
60
80
80
100
100
IS THERE A STATED COMMITMENT THAT THE EXTERNAL AUDIT
CONTRACT WILL BE PUT OUT TO TENDER AT LEAST ONCE EVERY
10 YEARS IN LINE WITH THE NEW CODE? (%)
Yes No
HOW MUCH INFORMATION IS THERE SURROUNDING THE COMPANY’S
RISK MANAGEMENT PROCESS? (%)
1.3 5.1 0.7
26
2
23.7
29.9
41.4
47.8
22.1
20142015
Audit committee
HOW MUCH INFORMATION IS THERE SURROUNDING THE COMPANY’S
INTERNAL CONTROL SYSTEMS? (%)
0.3 5.8
35.9
4.6
32.1
19.7
39.846.8
15.1
20142015

10
Lab project report: Reporting of audit committees, FRC, October 2013.
“Companies have started to improve
their risk management and internal
controls disclosures, enhancing their
mitigating actions and providing
more detail about ongoing
assessment processes.”
FTSE 100 outstrips smaller peers on risk
Once again there is a clear difference in best practice here between
the FTSE 100 and FTSE 250. Companies have started to improve
their risk management and internal controls disclosures, enhancing
their mitigating actions and providing more detail about ongoing
assessment processes. However, organisations should note that as
of this next reporting season they need to consider, and confirm,
their assessment and monitoring of the risk and internal control
environment throughout the year as opposed to at one point. The
results for the FTSE 100 in respect of disclosure and awareness around
risk and internal control are encouraging but new entrants and smaller
companies may wish to reflect on their results and take them as an
early warning that more attention may be needed in future.
Significant financial statements issues
“A separate section of the annual report should describe … the
significant issues that the committee considered in relation to
the financial statements, and how these issues were addressed.”
Following the publication in October 2013 of the FRC Financial
Reporting Lab’s report into audit committee reporting, FTSE 350
companies have had two years to adjust to the closer scrutiny of
audit committees and their work programmes.10
Our review found
that overall disclosures in this area have improved with only four
companies within the FTSE 350 giving no explanation. Seventy two per
cent of companies now give a good or detailed explanation versus 65%
in 2014.
Audit committee

FAST
FACTS
• Only 7% of companies
failed to give a good
description of their
remuneration policy
• The average
remuneration report is
18.1 pages, no change
compared to last year
• Basic salary has risen
by 5% for FTSE 350
directors
• The average bonus
has risen from 111%
of salary to 114% of
salary
• 103 companies have
a maximum bonus
of more than 150%
of salary. Financial
services is the most
prevalent sector
with 28 companies,
followed by consumer
services with 23
companies
• 85.9% of FTSE 350
companies have
a clawback, but
no company has
exercised this provision
“Executive directors’ remuneration should be designed to promote the
long-term success of the company. Performance-related elements should
be transparent, stretching and rigorously applied.”
(UK Corporate Governance Code, main principle D.1)
The amount of space devoted to remuneration remains stable at just over 18
pages. However, the quality and level of remuneration reporting does not yet
reflect the degree of attention that has been focused on it throughout the
financial crisis.
The linking of executive pay to strategic delivery, supporting the long-term
sustainability of the business while promoting the agreed strategic direction is
more commonplace – although reducing this to a one sentence explanation is not
meaningful. The most notable absence is the lack of reporting of any clawbacks
being invoked. Until such time as clawback provisions are used, they remain
untested and are considered as ‘having no teeth’.
The total remuneration received by the FTSE 350 has, unsurprisingly,
continued to increase, especially within the longer term elements, with dramatic
increases in the awarding of options. However, we cannot determine from the
reporting alone whether this is due to share price appreciation or an increase in
the number of share options granted.
2015 2014 2013
2250,000
2000,000
1750,000
1500,000
1250,000
1000,000
750,000
500,000
250,000
0
COMPONENTS OF EXECUTIVE PAY (£000)
Salary
Bonus
Pension
Options
Other benefits

Almost all companies show the link between remuneration
and their wider business strategy. This is mainly disclosed
in the remuneration report and is often a one sentence
explanation that adds little value. Only 14% of FTSE
350 companies include and expand these explanations
in the strategic report, incorporating their remuneration
packages into the business model with KPIs to measure the
correlation and the impact.
Link of remuneration to strategy (%)
Yes – Linkage
seen in the
remuneration
report only
Yes – Linkage
seen in both
the strategic
report and the
remuneration
report
No – Link
between
strategy and
remuneration
not seen
FTSE 350 81.7 14.1 4.2
FTSE 100 84.9 20.4 0.0
FTSE 250 82.1 11.3 5.7
Clawback provisions lack bite
“In designing schemes of performance-related
remuneration for executive directors, the
remuneration committee should … include
provisions that would enable the company to recover
sums paid or withhold the payment of any sum,
and specify the circumstances in which it would be
appropriate to do so.”
(UK Corporate Governance Code, D.1.1)
As highlighted above, in 2015 no FTSE 350 companies
invoked the clawback or malus provisions in their
remuneration policies (where they had them). Most
institutional investors support the Code’s approach which
allows companies to adopt the most suitable incentive
structure to facilitate the execution of strategy, and are
happy to leave the board to decide on the particular set of
circumstances which might lead to applying either clawback
or malus provisions.
It is noteworthy that 2015 saw a significant increase in
the number of companies including clawback provisions.
“The quality and level of remuneration
reporting does not yet reflect the degree
of attention that has been focused on it
throughout the financial crisis.”
This year 86% of the FTSE 350 state they have these
provisions in place, compared with 75% in 2014.
Is there a clawback provision? (%)
FTSE 350 Yes No
2015 85.9 14.1
2014 74.9 25.1
Shareholding guidelines
“For share-based remuneration the remuneration
committee should consider requiring directors to
hold a minimum number of shares and to hold
shares for a further period after vesting or exercise,
including for a period after leaving the company,
subject to the need to finance any costs of acquisition
and associated tax liabilities.”
(UK Corporate Governance Code, Schedule A)
Our research found that 96% of FTSE 350 companies align
their remuneration policy to the longer term interests of the
company and its shareholders. The minimum shareholding
requirement for the chief executive is disclosed and is
concentrated between 100% and 200% of the base salary.
Only 36% of the FTSE 350, however, actually state the
retention period of shares after vesting, which usually lasts
for two or three years.
Of those 36.2% of companies that disclose the retention period of
shares, the periods disclosed stand as follows: (%)
Number of years of
companies that stated
holding period 0 0.5 1 2 3 4 5
3.5 1.8 5.3 42.5 35.4 2.7 8.8

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