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Corporate Governance Review 2021: asking for accountability

Sarah Bell Sarah Bell

What are boards doing now? Sarah Bell explains the findings of our latest Corporate Governance Review 2021.

After two years of focusing on the near-term, operational resilience, and new ways of working, the priority for boards is how to incorporate longer-term bandwidth - while dealing with a proliferation of wider market issues and the need to embed considered impact around ESG and stakeholder relationships. And it's not only shareholders and internal stakeholders' expectations that need to be managed: it's accountability to wider society. There is a need to look beyond financials: to culture, ESG, and wellbeing – all of this needs to be connected to your business strategy and how people are rewarded.

This is not a simple ask, with new systems, forms of data, longer time horizons and governance structures to be considered. A key finding of our latest Corporate Governance Review is that even businesses that are bringing all this together are struggling to embed it into their measurement and accountability. Only a few are measuring the impact of how they live their purpose and 60% are not demonstrating the links between their business model, strategic priorities, and culture. Improving engagement in tracking these factors is a priority for the UK Corporate Governance Code.

The complete landscape of corporate governance is explained our latest review: a survey of annual reports across FTSE 350 companies. You can get primers on the key issues by looking at the insight from our team.

How can you get the most out of governance reporting? Download the 2021 Corporate Governance Review

Cultural metrics drive corporate movement

"A strong, positive, and vibrant organisational culture helps drive business success, and attracts and retains talent. Both staff, customers, suppliers, and interested stakeholders want to be associated with organisations that align with their individual values. As our findings show, more companies are considering culture and its alignment to strategy; more audit teams are assuring it and assessing culture risk.

How do you monitor culture? Just as there's no single solution for building a good culture, there's no single solution for building a dashboard that will measure it.

It's important to ensure the measurements are as broad as possible and cover a range of stakeholders. For example, engagement scores at a point in time will only provide you with a limited data point. You need more both internal and external data measures, and lead and lag indicators as they'll give you richer data. Essentially, you need a range of measurements that reflects your unique culture, looking at trends across a period of time.

You need to treat your dashboard like a leaderboard. Putting these metrics in place will increase motivation to improve your results. Measuring culture does enable corporate movement, which can only be a good thing."

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Jacky Griffiths

Lead, People, Culture and ESG, Business Risk Services

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Internal controls help restore trust

"Properly designed and operated control frameworks, help safeguard your organisation, minimise risk, and can also drive efficiencies. Many recent high-profile corporate governance failures stem precisely from the lack of effectively designed or functioning controls. Increasingly, regulators and investors are looking for businesses to provide more visibility and confidence and this will likely only grow.

While the UK already has various requirements relating to internal control assessments, the recent BEIS consultation on audit market reforms, 'restoring trust' centres on visibility, accountability, and assurance. Key proposals in the BEIS response strive to support this: developing an Audit and Assurance Policy that articulates how companies assure integrity of reporting, and reinforcing directors accountability for operating an effective internal control system through a code-based approach strengthening boardroom focus on internal control matters.

In this context, it's surprising that this year the percentage of companies providing basic or general explanations has fallen from 66% highlighted by of our review in 2020."

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Emma Young

Director, Business Risk Services

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ESG – get your targets right

"For accounting periods commencing on or after 1 January 2021, companies with a UK premium listing are required to make disclosures in line with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) on a comply or explain basis. The Financial Conduct Authority (FCA) extended this rule to standard-listed companies* for periods commencing 1 January 2022.

TCFD includes requirements for an organisation to disclose the metrics they use to assess climate-related risks and opportunities and the targets used to manage these. This may include areas such as greenhouse gas (GHG) emissions, water usage, or energy usage. When reporting on targets set, organisations are required to disclose the KPIs used to assess the progress made against targets set.

The targets you set should be in line with anticipated regulatory requirements, market constraints or other goals. For example, the commitment made by the UK to reduce GHG emissions to net zero by 2050.

To enable reporting to the board and wider stakeholders, you should define the KPIs for assessing progress against targets set. While we've seen an increase in environmental KPIs from last year’s research (9%), we would hope to see this increasing significantly on the back of the incoming regulations and increased stakeholder focus."

* Issuers of standard listed shares and standard listed global depositary receipts representing equity shares. Excluding standard listed investment entities and shell companies.

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Laura Tibbetts

Associate Director, Financial Accounting Advisory Services

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Succession planning adds value at every level

"Is succession planning below board-level always given the attention it deserves? It seems unlikely, not least because of the time and resource required. Succession planning can feel like an activity that lacks value, more relevant when workforce retention was stable and candidate-mobility wasn’t so common.

The UK Corporate Governance Code's guidance is clear: ‘the board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and the senior management positions, and oversee the development of a diverse pipeline for succession.’

How can you make succession planning a valued activity without overreaching to the role of the Executive? According to our latest governance research, few are doing it well.

Boards and management teams that do understand the purpose of succession planning see it as an integral part of the board’s work on strategy, most noticeably in the areas of market and scenario- planning, and future leader development. And if the results support the strategy, then the primary sponsor must be the CEO."

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Karen Brice

Director, Governance and Board Advisory Services

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Risks are always evolving

Risks realise themselves in different ways as seen recently with the global pandemic and geopolitical risks have led to significant disruption to businesses and their supply chains. It's good to see that almost all businesses are now reporting on emerging risks. True visibility requires more clarity on both the potential impact of these risks and how you plan to respond to them.

Emerging risks are inherently fast-paced and uncertain, so key mitigating actions usually involve building resilience. In our experience, the response to emerging risks should be built into your business model and strategy.

Climate change is a great example of an evolving risk driven by both regulatory change and the need to adapt to a changed environment. The best companies see this as an opportunity to innovate and gain competitive advantage through positive, proactive actions, and a structured ESG agenda tied into their business strategy. Annual report disclosures must provide this detail to all stakeholders."

Ben Langford, Director, Business Risk Services

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Ben Langford

Director, Business Risk Services

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