Corporate governance

Five principles of good governance – accountability

Simon Lowe Simon Lowe

In a risk averse, blame attributing society, accountability is often seen as a way of shifting responsibility. But it should be a process that helps businesses manage risks, protect existing value and enable further value-creation.

A company’s board is publicly accountable for its successes and challenges. As accountability becomes increasingly public, boards must demonstrate responsibility for decision taking. But accountability is more than meeting regulatory requirements or explaining how things went wrong, it is about holding others to account and being accountable to others. 

Defining board accountability

Understanding of accountability is inconsistent. Accountability and transparency go hand-in-hand. While not all decisions can be shared outside the business, the right tone can be established for shareholders and wider stakeholders through the way a company communicates its strategy, risks and results. They should be able to understand a board’s decision-making process: its responsibility, challenges and how it plans to address them. Informed investors can weigh up the risks and make their own judgements; the ill-informed can only react, or overreact, to events. Demonstrating accountability – particularly in the annual report – gains stakeholder trust and earns capital; be it investment funds, supplier working capital or the commitment of employees and customers.

Accountability is not always easy to demonstrate. We find consistently in our Corporate Governance Review, that while companies are typically good at explaining what they did, they often provide less detail around why they did it.

Accountability and governance – what to consider

The principle of accountability relates to the board’s ability to ensure they conduct and present a fair, balanced and understandable assessment of the company’s position and prospects. In reporting, accountability should be addressed throughout the annual report. It should relate back to the company business model and strategy, as well as how the board is addressing the business risks and viability. The audit committee is particularly important, clearly demonstrating accountability in its reporting on key matters like:

  • preparing accounts
  • principal risks and risk management
  • internal control systems and how they are monitored
  • the selection, use of and interaction with internal and external auditors.

As a business, here are some things you should consider:

Strategy

Is your business strategy and model connected to other key areas of concern for the board, such as risks, KPIs, remuneration, nominations and succession planning? If so, how does this strategy underpin your decision making?

Responsibility

Are there clear delegated levels of authority for the board and for others in management? Do directors and managers understand who is responsible for decisions and actions, and acknowledge their personal and group accountability? Are these documented and regularly reviewed in the light of new and emerging business streams and is there a process for monitoring that they are operating effectively?

Transparency

When making board decisions, are you clear about how and why the board and committees come to their decisions? Can these be reported transparently?

Are you transparent in outlining how the independence of external auditors is established and maintained? Do you provide detail on the tender process, and how and why you chose the auditor? Although relating primarily to relations with auditors, the same process should apply to other external advisors, such as search firms, boards evaluators or remuneration consultants.

Culture

It is important to understand the culture of decision-making. Are you seeking to empower your employees or guide them?  How is the culture of the organisation promoted from the board and embedded into the organisation?

Risk

How is risk viewed within your organisation and what is the process for risk management? Does your strategy require you to be risk enabled or risk averse?

Accountability can be a vague topic but it shouldn’t be. It is critical that internal and external stakeholders have a fair, balanced and understandable assessment of the company’s position and prospects so that they in turn can chose where and when to invest their ‘capital’. The board needs to consider what accountability means and then address it and demonstrate its commitment.

To find out more about our governance and board advisory services, speak to Sarah Bell or Simon Lowe

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