As modern corporate governance turns 21 following the 1992 publication of the Cadbury report, we review where UK businesses are succeeding in demonstrating accountability – and the areas that still need work.
The edited highlights below are from my executive summary in Grant Thornton’s annual Corporate Governance Review. The report analysed the annual reports of 296 of the UK’s FTSE 350 companies with years ending between June 2011 and April 2012.
Further insight from this in-depth 40-page report on UK corporate governance is available to download here: The chemistry of governance: A catalyst for change. [ 3705 kb ]
Building on Cadbury’s foundations
This year, just over half (51%) of all FTSE 350 companies complied with the UK Corporate Governance Code (the Code) – the latest distillation of Cadbury’s recommendations. A further 10% of companies complied for part of the year.
The level of full compliance appears to have plateaued at around the halfway mark: this year’s 51% ratio is 1% up on 2011 and the same as 2010.
Encouragingly, they tend to comply in all but one or two provisions, with an increasing number, 73% (2011: 63%), giving more than a basic explanation for non-compliance, and 44% saying they plan to comply next year. However, it is concerning that two-thirds of those who chose not to comply in consecutive years have not changed their explanations.
Chairmen espouse ethical leadership
We have identified an emerging practice among chairmen: one in 20 now emphasise the importance of company culture to effective governance.
Although too early to call this a trend, the role of culture and ethical principles in cementing effective governance is gaining credence.
Seventy-five per cent of chairmen now provide some insights into the governance practices of their boards and a growing number, 23% (2011: 10%), use their primary statements to emphasise the importance of good governance.
This year, externally facilitated board effectiveness reviews were embraced by around 30% of companies, with 102 board assessments. Yet companies remain shy about sharing the output, focus or even the name of the facilitators of their reviews: just 35% gave a good account of review outcomes, up from 24%.
From next year, all companies will have to identify their facilitators.
Quality vs quantity
The seemingly inexorable trend of providing more, but not necessarily better, information continued. The average length grew by almost 4%, to 141 pages. This is an increase of a mind-numbing 16.5% since 2009.
Many companies still give no clear pointers to their strategic vision: just one in five linked strategy to risks and key performance indicators. While the disclosure of risks again increased, many companies repeated previous years’ almost verbatim rather than reflecting the dynamic discussions at boardroom tables.
Institutions must foster better practice
The ‘shareholder spring’ saw institutional shareholders finding their voice, most notably about executive pay and board elections.
The number of companies actively seeking engagement with investors increased to 73% (2011: 62%). However, anecdotal information suggests the institutions are more reticent to engage, certainly on matters of governance, claiming lack of resource and/or sufficient existing engagement with the executive team. If strong governance is a proxy for long-term success, this balance needs to be addressed urgently.
It is now time for shareholders to act to ‘encourage’ best practice across UK plc. If they do not ‘call the directors to book’ the regulators may do it for them and, in so doing, threaten the ‘comply or explain’ cornerstone of UK corporate governance. While deliberations at the European Commission seem to have backed off from wholesale abandonment of the principles based approach, greater emphasis is being placed on the quality of explanations and shareholder engagement.
The enduring glass ceiling
Finally, although somewhat overshadowed by the gender issue, our review charts the continuing diversity challenge.
With little measureable information about diversity on boards, gender and age provide useful yardsticks. After recent high profile resignations, the gender debate is now turning to the heart of the board: the executive role.
Here we find only one female chairman in the FTSE 100 and two in the Mid 250. Twenty-one women are in executive positions but only two female chief executives remain. The average age of a company chairman, at 63, is 11 years more experienced than a chief executive.
Raising the game
The governance excellence of the best companies encourages others to raise their game. It also highlights the poor performance of the few – companies that want the rights of access to public capital and market liquidity but shirk the responsibilities that come with it.
To deliver effective governance, compliance must be underscored by an ethical tone from the top, manifested in strong board leadership and the establishment – and embedding – of clear values. This was recognised by Cadbury 20 years ago and it remains the case today.