I believe that corporate governance has become an industry in itself, with conferences and conventions gathering all the like-minded people who look at existing best practice and seek ever more ways of creating more best practice.
At times it is difficult to remember why companies “do” corporate governance other than to placate this ‘industry’ by covering every area of potential risk and potential corporate disaster.
With our own corporate governance code (the QCA Code) we constantly remind ourselves that the purpose of good (not best) corporate governance is to ensure that the structures and behaviours that a company adopts are commensurate with creating long-term value for shareholders. In other words everything you do should be judged against the question: “How does this help us create long-term value for shareholders?”.
And as part of this approach it is important to recognise that shareholders need to be able to see what you are doing. It is not enough to do it, it’s the way that you disclose actions that matters.
For the last five years we have selected a sample of listed companies and looked at their accounts and websites to measure the level of their disclosure when it comes to corporate governance. We do this in partnership with the accountants UHY Hacker Young who do the detailed research. They benchmark the disclosure of each selected company against the minimum disclosures of our QCA Corporate Governance Code. And when we get the results we share them with a group of investors to see what their take is and where companies should be fixing their attention.
This year’s results are comforting at one level as 50 per cent of AIM companies are now using the QCA Code as their reference point against only 26 per cent last year. I think this demonstrates how corporate governance is being pushed up board agendas. As long as this is being done in a positive and practical way to create more value for shareholders, rather than just to placate the corporate governance behemoth, then this must be a good thing.
At another level we are not seeing strong increases in the level of disclosures relating to Audit Committee and Remuneration Committee reports. For instance only a third of companies include details of significant issues considered by the Audit Committee in relation to financial statements and how these issues were addressed. So there is more to be done by companies.
The investors who attended the roundtable discussion gave their views which we have distilled into five top tips:
1. Describe the relationship between your company’s strategy and your governance arrangements effectively and explain your board’s role in realising the company’s objectives.
2. Articulate your company’s story in an engaging way and take the time to avoid boilerplate disclosures.
3. Set out clearly how your board’s performance is evaluated and what is being done as a result.
4. Provide a single total remuneration figure for each of your directors within a focused remuneration report.
5. Explain each director’s role to demonstrate how your board has the appropriate balance of skills and experience.
I think that when the board of a company follows these tips conscientiously it will be going a very long way to building a constructive dialogue with shareholders. We hear many experts telling companies that corporate governance should not be a box-ticking exercise. But I disagree as I think box-ticking is a good thing if you do it at the right time. It’s how you go about it.
Companies may adopt good practice; they may do all the things that will deliver long-term value for shareholders, but if they do not communicate this and make the information available to shareholders then no one will be the wiser and trust cannot be developed. Once good corporate governance has been put into place, and the board are confident that they have done only what is needed to create long-term value, then the board should ensure that in the relevant section of their website there is an index showing where each disclosure required by the QCA Code can be found. Each box needs to be ticked to help shareholders find what they are looking for.
So as Bananarama sang at the Grassington festival last summer, it ain’t what you do, it’s the way that you do it and that’s what gets (financial) results!