Article

Driving good governance through 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. This means demonstrating responsibility for its decision-making.

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.

Why provide accountability?

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.

But 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.

Tying in accountability and governance

The principle of accountability relates to the board’s ability to ensure it conducts and presents 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 dealing with business risks and viability.

The audit committee is particularly important, clearly demonstrating accountability in its reporting on key matters such as preparing accounts, principal risks and risk management, internal control systems, and 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 they can choose where and when to invest their capital. The board needs to consider what accountability means and then address it and demonstrate its commitment.

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