Celebrating and improving governance
The United Kingdom is regarded as a world-leader in good corporate governance. Sometimes we forget this, particularly when we are faced with press reports of a corporate scandal. However, the recent Financial Reporting Council (FRC) report on ‘Developments in Corporate Governance and Stewardship 2014’ highlights a generally strong corporate governance culture.
Progress is being made on the proportion of women directors in the FTSE 100, there are reported improvements in the quality of disclosures by Audit Committees, and it seems more companies are now retendering their external audit contracts. With the recent updates to the UK Corporate Governance Code, there are new requirements for risk management and reporting, and remuneration, all designed to encourage boards to look further ahead and be more accountable.
We are delighted to see that corporate culture is now being highlighted by FRC as a key priority for boards. It is now recognised that ‘Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole’. The FRC report also highlights ‘the need for boards to think hard about assessing whether the culture practised within the company is in line with what they espouse’, and urges emphasis on consistency. Included in the risk management guidance from FRC is reinforcement of the need for boards to ‘be frank about their capabilities to address the threats to the long-term success of the company, which includes threats arising from behaviour in the company’.
The FRC recommends that companies consider a number of key issues in 2015, including:
- The importance of good corporate culture and embedding sound governance behaviours throughout companies;
- Board composition and ensuring suitable succession planning is in place;
- Effective board evaluation and reporting;
- Active engagement between boards and investors and improved reporting in this area;
- Early consideration of the new viability statement (from the updated Code);
- Maintaining effective risk management and internal controls;
- Focussing on the quality of explanations under the Codes; and
- Committing to clear and concise reporting.
For companies which are not publically listed, paying attention to these issues is still very important. Above all, developing an organisational culture where good governance is demonstrated consistently in the behaviours of the board, management and staff will reap results in business performance as relationships with stakeholders, suppliers, customers and staff improve.
We have often said that getting the right people in the boardroom is essential to high performing organisations and this is backed up by the FRC’s focus on board composition and succession planning. Recruitment of the next CEO or board member begins long before the current incumbent leaves, and boards must plan well in advance to ensure the best candidates join the organisation.
Evaluating the performance of your board is another must. The FRC recommends that this is done by external advisers every three years to provide a degree of independence which will increase confidence among key stakeholders, and also help your board understand its development needs.
Risk remains a key issue. Boards should remember that risk is a constant in any business. It is the job of the board to make sure risks are properly managed, and to ensure contingency plans are in place should the worst happen.
The FRC’s corporate governance team will concentrate on five main areas of work in 2015:
Company culture: how best to assess culture and practices and embed good corporate behaviour throughout companies.
‘Comply or explain’: pursuing better explanations by re-stating the benefits of this approach and encouraging better explanations.
Succession planning: continuing their work and publishing a discussion document in the Spring.
Stewardship Code: promoting the benefits of stewardship and increasing their scrutiny of adherence to the Code in order to improve the quality of practice and reporting.
Proxy advisors: considering what role the FRC might play in overcoming communication problems in this area.
Focussing on such issues in your boardroom will lead to rewards of higher performing teams, increased customer satisfaction, improved stakeholder relations, and ultimately business success.
Some useful reading –
- The Oxford Handbook of Corporate Governance
- Corporate Governance: Principles, Policies, and Practices
- Corporate Governance and Accountability
- Corporate Governance: Law, Regulation and Theory
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