FRC warns of ‘engagement deficit’ among investors

INVESTORS are failing to engage with companies or provide sufficient insight into their activities, the Financial Reporting Council has said.

The reporting watchdog is currently one year into a three-year strategy that aims to improve investor stewardship, but has warned that there remains “considerable room for improvement” in the commitment that fund managers and owners show to the companies in which they invest.

In its latest annual report, the FRC raised concerns of an emerging “engagement deficit” among investors in mid-market companies and that a lack of direct contact with shareholders is feeding the perception that proxy voting agencies “wield undue influence” over voting outcomes.

Additionally, the FRC found companies are struggling to comply with governance best practice and that investors need to be as transparent as the companies they invest in. “Many statements on the stewardship code give limited insight into the investors’ actual practices,” the FRC said.

The FRC also found that corporate reporting in the UK is good overall, although the quality of reporting by smaller listed companies “could be improved” and intends to identify the root causes of the failing and encourage improvements in quality.

Seeking stronger powers

It would also like to see its powers strengthened, particularly in the area of corporate reporting. The FRC is currently speaking to BIS to increase its powers to report faults in reporting and auditing in instances when the faults do not amount to misconduct and do not require a public tribunal.

The FRC is also soon to publish a thematic review of the quality of auditing of banks and building societies to find out why progress in improving their quality has been so slow. The review will focus on the testing of loan loss provisions and general IT controls and look carefully at issues including the specific actions taken by the major firms to address issues previously identified and whether they have been effective.

Finally implementing Lord Sharman’s recommendations on going concern reporting will also be a key requirement for the FRC in the coming months. It has so far struggled to deliver an accepted interpretation of the recommendations with its most recent proposals described as “damaging to the public interest”.

In a letter to the Financial Times, investors accused the regulator of “perversely” proposing changes that “run contrary” to the aims of the Sharman Review. The FRC is set to face the House of Lords Economic Affairs Committee next week where it will be grilled, among other things, over its controversial proposals on going concern.

Total expenditure for the year rose 1.9% to £26m. Staff costs accounting for £14.7m, a £1m rise on the previous year.