With the increasing pressure on the FTSE 350 to disclose more information, at a recent seminar we asked whether increasing disclosure requirements leads to better governance practices?
In January, the Grant Thornton Governance Institute co-hosted a breakfast seminar with Pinsent Masons. At the event, alongside a presentation of the key findings of our Corporate Governance Review, the Financial Reporting Council (FRC) presented its Developments in Corporate Governance and Stewardship 2016, and Pinsent Masons gave their legal perspective.
This was followed by a lively panel discussion with me, Paul George, Executive Director – Governance & Reporting at the FRC; Amanda Mellor, Group Secretary and Head of Corporate Governance at Marks and Spencer and Martin Webster, Pinsent Masons.
Good disclosure = good governance?
The principles of ‘comply or explain’ rests on an assumption that requiring companies to disclose information is the way to encourage good practice.
During the panel discussion Martin Webster argued this point with examples of where it can work in practice, stating “Ticking boxes for the sake of it will never be the answer, but one benefit that disclosure can have is to nudge companies towards better practice”.
He also offered the example of women on boards, saying that “we are unlikely to have achieved such an increase in women on the boards of major companies in the last few years if they had not had to disclose what they were doing to improve gender diversity".
Research from our latest Corporate Governance Review 2016 supports this in relation to gender. As well as seeing an increase in disclosure around gender, in the last two years companies are also talking more about other areas of diversity, such as age, ethnicity, skills and experience.
From gender diversity to wider diversity
Last year, 76% of the FTSE 350 discussed diversity in their annual reports in areas other than gender, up from 55% the year before. This represents a shift in focus; to date, spurred on by Lord Davies, all the attention has been on gender diversity, now the conversation is moving to wider diversity.
Paul George offered more examples. He pointed out that recent changes to the Code, such as the introduction of, the viability statement and the strategic report [ 1524 kb ], underpinned by the requirement for all disclosures to be ‘fair, balanced and understandable’ are all changes in reporting requirements that encourage boards to give greater insight to the users of the accounts.
Amanda Mellor echoed this. She noted that from her experience the introduction of the viability statement was very useful for the board, encouraging them to look at many aspects of the business more than a year (and, in the case of Marks & Spencer, three years) and to give even greater attention to the really big strategic risks over the horizon.
Quality reporting still the exception rather than the rule
Of course, this is only beneficial if reporting is taken as more than an exercise in ticking boxes and leads to systemic and long term change. Our own research shows this too: although over half of the FTSE 350 cover all the aspects of the strategic reporting guidelines, only 16 companies provided really detailed, clear and connected strategic reports that covered all the bases.
In our research we frequently see companies providing only the bare minimum, where it is clear to us that they have just reshuffled what they had disclosed previously, added a few signposts and called it a strategic report.
In contrast the very best 16 have taken the opportunity to rip up what they had and start again, truly embracing the principles underlying the FRC guidance of transparency and accountability.
The importance of trust and integrity in corporate reporting
The health and prosperity of the UK is dependent on the creation of a vibrant economy. For such an economy to work efficiently there has to be trust; trust between governments, communities and business, and between businesses and their stakeholders.
Without this, regulations increase, risks premiums rise, decision making and investments stall, and cash circulation declines; all adding to the cost of capital. Ultimately society pays in one way or another. The promotion of transparency and accountability is a fundamental enabler of trust in business. That’s good governance.