All listed companies on the London Stock Exchange have to follow the UK Corporate Governance Code. This is a globally recognised code of conduct for companies, which sets out some specific guidelines as to how boardrooms should be composed and how they should operate.
The UK Code and its related guidance have grown over the years so that many companies feel that it is onerous and just a box ticking exercise.
However, seeing the UK Code treated as mere red tape may lead politicians to step in and turn corporate governance rules into legislation. The concept of “comply or explain”, an approach which is now adopted throughout Europe, is something we should ensure remains a key feature of corporate behaviour.
The alternative is the sort of central government diktat that frustrates business and kills off enterprise. No two companies are the same and no two companies can structure themselves and operate in the same way.
For AIM and ISDX companies that do not have to follow the UK Code, the Quoted Companies Alliance has developed the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies.
The QCA Code is adopted by about a third of all AIM companies. Again, it operates on a “comply or explain” basis, and we recognise that small and mid-size quoted companies need flexibility in the way they operate and approach the implementation of their business model and strategy.
In our annual check of corporate governance behaviours with accountancy firm UHY Hacker Young, we looked at a random sample of 100 companies, examining their corporate governance disclosures in their annual reports and on their corporate websites. The results are extremely patchy and are reviewed for us by some fund managers so that we get the investors take on the results.
This year, it was clear that, as they approach the reporting season, the areas companies should concentrate on are:
1. Linking strategy and corporate governance;
2. Understanding risks facing the business and explaining how they link to strategy;
3. Focusing on communicating the work and oversight of the audit committee;
4. Describing how the board evaluates its performance; and
5. Explaining why each director is on the board.
In the case of linking strategy and corporate governance, only one company out of the 100 reviewed actually did this. I find this both astonishing and disappointing to say the least.
This is at the very the heart of good corporate governance and its absence must lead investors to wonder whether companies have any interest in communicating how their corporate structures and behaviour are designed to create sustainable long-term value for shareholders.
There is no point in ticking corporate governance boxes; there is every point in ensuring that what you do in terms of corporate governance leads to delivery of your strategy and the creation of sustainable long-term value for shareholders (creating jobs in the process).
Governance needs to be intelligent and applied in a thoughtful and business-minded way.
If companies do not get a grip on governance and use it as a strategic tool, then we will see the politicians clumsily step in and turn it into a regime of compliance that will work for no one.