SMEs need to get message across better

We looked at 100 small and mid-size quoted companies across a range of sectors and markets and benchmarked their published corporate governance disclosures against the recommended minimum disclosures in the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies. We did not assess the quality of their disclosure – instead we just focused on whether a company disclosed the suggested minimum disclosures.

We found that the level of corporate governance disclosure varies greatly. For example, while 81 per cent of companies analysed referred to following a specific code, only three per cent disclosed how the application of that code supports the company’s long-term success and its strategy for growth.

One of the key findings is that boards need to become more effective in articulating how and why their decisions link strategy, governance and proper risk management. Specifically, we found:

Only 38 per cent of small and mid-size quoted companies followed recommendations to explain how the businesses’ risks align with the strategy of the company.

68 per cent of remuneration committee reports reviewed explained how the company’s remuneration policy and practice align with the company’s strategy.

Only 31 per cent of companies provided an explanation to shareholders of how the objectivity and independence of their auditors is safeguarded.

Just under half (43 per cent) of companies explained to shareholders the independence of non-executive directors.

Only 14 per cent of companies provided a description of performance evaluation procedures for the board, each committee and directors.

Just over half (56 per cent) of companies clearly articulated their strategy.

Areas where there are good levels of disclosure tend to be in relation to companies providing standing information. This includes companies providing their annual report and accounts and other governance material on their website; brief descriptions of the work of each board committee and its role; information on directors, their roles and committee membership; and the responsibilities and accountability of each board committee.

Conversely, small and mid-size quoted companies tend to struggle with more elaborate disclosures, such as a summary of board evaluation procedures, the results of the evaluation and any action. Other areas of weak levels of disclosure include a summary of the information received by the board and individual committees; an explanation of the role of external and internal advisers; and, in the cases where the company secretary is also a director, an explanation for this.

Our review also offers some invaluable top tips to quoted company directors for this reporting season, drawn from discussions with institutional investors on the results of this analysis.

Investors stress that ‘ticking all the boxes’ is not necessarily expected or what companies should aim to do. Instead, investors want to understand what governance structures and processes companies have and why. They want to read this in a company’s own words.