Driving value from enhanced transparency
Why should companies embrace greater disclosure?
The Financial Reporting Council (FRC) has committed to review the UK Corporate Governance Code with a Government green paper, calling for the corporate governance framework to be extended beyond the FTSE 350 to all companies with a premium listing on the London Stock Exchange. As more organisations potentially fall under the reporting remit, it is time for companies to rethink their corporate governance approach. Often seen as a burden on company resources and time, corporate governance reporting can also be an opportunity. It provides a valuable framework for driving transparency across the whole business and has the potential to enhance value, trust, resilience and growth.
Corporate governance reporting trends
Six key areas for consideration:
It is crucial to clearly articulate what the company does, how and why; and identify the organisation’s competitive advantage. This is an area where most FTSE 350 organisations are focusing their corporate governance efforts. Grant Thornton’s corporate governance review 2016 found seventy-two percent of the FTSE 350 provide a good or detailed explanation about their business model, connecting it to KPIs and strategic risks.
Findings from our 2016 review suggest that companies underestimate the importance of long-term succession planning. We found that only fifteen percent of the FTSE 350 provide real insight into succession planning. This shows many companies do not adequately align their evolving strategic needs and board composition despite the fact this is essential for delivering long-term strategy.
Diversity beyond gender is becoming more relevant to FTSE 350 organisations. The 2016 review found that seventy six percent of companies identified diversity, in its broadest sense, as a priority. This is no longer just a challenge for board level, especially with the Parker review into ethnic diversity recommending FTSE boards to have at least one director of colour and the EU focus on diversity within the non-financial reporting.
According to the 2016 review only twenty per cent of the FTSE 350 provide good discussion on culture yet this will continue to be an area of importance. The FRC have said that the reporting of an organisation's culture is a key focus because it can help to determine the likelihood of corporate success or failure.Are your values well defined by the board and are your employees’ behaviours aligned with these values?
The Strategic Report
In 2013, the Government published new regulations resulting in an amendment to company law requirements. This means that large and medium sized businesses are required to provide a ‘Strategic Report’ as part of their annual report. This is an opportunity for the business to communicate messages about the company’s priorities and achievements – past, present and in the future. Our 2016 review suggests that currently the FTSE 350 are good at talking about what they have done, less good at talking about what they do now and need to improve their disclosures on the future which is a missed opportunity. Less than half of the FTSE 350 now provide high-quality forward-looking statements.
The annual report is a tool for companies to communicate information about their business to investors. It is also how companies deliver their message to other key stakeholders and a great opportunity to improve trust in the business. Investors, employees, customers, suppliers and other stakeholders are interested to see:
- Information that is specific to the company and how value is created and protected
- Key markets and market segments, key revenue and profit drivers
- A clear and comprehensive overview of the company, business model, KPIs, principal risks and board matters. Showing how the strategy is integrated with the business model, the company can better explain how its strategy has been specifically devised to optimise its resources and relationships to achieve its objectives
- Your company’s competitive advantage – what differentiates you, not the secret recipe
- Plain, clear, concise and factual language
The Grant Thornton Governance Institute works with a range of clients across sectors: corporates of all sizes, NFPs, Education and Housing boards, in giving them advice and assurance over the information they put into the public domain. To find out more about how you can develop, strengthen and maintain your governance practices, please speak to Simon Lowe.