Corporate Governance - What you need to know Article Image

Corporate Governance - What you need to know

Corporate Governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies while the shareholders’ role is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

Corporate governance covers a very wide range of issues and disciplines from company secretarial and legal, through to business strategy, executive and non-executive management and investor relations, to accounting and information systems and remuneration.

Corporate governance in the UK corporate sector is primarily concerned with:-

The procedures adopted by the board and its committees to discharge its duties (e.g. membership of the board; frequency of, and procedures at, board meetings; the role of non-executive directors; constitution and terms of reference of audit and remuneration committees; and the role of the company secretary).

The board’s accountability to shareholders and other stakeholders (e.g. annual reporting; use of AGMs; and shareholder voting rights).

The manner in which the board controls the company or group (e.g. management structures; group legal structure; and internal control philosophy and practice).

Best Practice

Best practice is about achieving the stakeholders’ goal, and delivering success in an ethical way.  Hence it follows that it must entail a holistic application of good management. The five golden rules are as follows:-

Ethics - a clearly ethical basis to the business.

Align Business Goals - appropriate goals, arrived at through the creation of a suitable stakeholder decision making model.

Strategic management - an effective strategy process which incorporates stakeholder value.

Organisation - an organisation suitably structured to effect good corporate governance.

Reporting - reporting systems structured to provide transparency and accountability.

The regulatory approach to the subject would regard governance as something on its own, to do with ensuring a balance between the various interested parties in a company’s affairs, or more particularly a way of making sure that the chairman or chief executive is under control, producing transparency in reporting or curbing over-generous remuneration packages.

The essence of success in business is:-

  • having a clear and achievable goal;
  • having a feasible strategy to achieve it;
  • creating an organisation appropriate to deliver;

having in place a reporting system to guide progress.

Main Principles

Leadership

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business.  No one individual should have unfettered powers of decision.  The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.  As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

Effectiveness

The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.  There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.  All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.  All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.  The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.  The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.  All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

Accountability

The board should present a fair, balanced and understandable assessment of the company’s position and prospects.  The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives.  The board should maintain sound risk management and internal control systems.  The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

Remuneration

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.  A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.  There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors.  No director should be involved in deciding his or her own remuneration.

Relations With Shareholders

There should be a dialogue with shareholders based on the mutual understanding of objectives.  The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should use the AGM to communicate with investors and to encourage their participation.

Reporting Procedures

Conciseness paradox

Reporting requires a focus on the right information for the right audience.  The key to successfully achieving conciseness is to focus integrated reporting on the outcome of an organisation-specific materiality determination process.

Telling an authentic story

A significant opportunity exists for organisations to tell their authentic story, which is crucial in building trust with stakeholders, without “spin” – the current and future challenges as well as the good news.  Consider the way results are highlighted, case studies are used, progress is reported against targets and adjusting items are explained.

Broadening horizons

Integrated reporting challenges organisations to think about communicating not only an account of what happened in the past, but a story about its ability to create value in the future.  Broader consideration of an organisation’s value chain and looking beyond existing reporting boundaries that represents a real shift in mindset towards integrated reporting and arguably the biggest opportunity/challenge is the best way forward.

Rethinking performance

By focusing on the business model and considering broadening horizons encourages companies to focus on measuring what really drives their business.  A true commitment to this wider reporting agenda can often be seen when key performance indicators are linked to the remuneration of organisation leaders.

Creating connections

At the heart of integrated reporting is the desire to communicate clear connections between the critical content elements of the framework.  This is in order to avoid reports appearing disjointed and containing different and sometimes conflicting messages, key themes remaining undeveloped or the connection between key activities or measures being poorly demonstrated.  This can give the impression of siloed management or limited strategic thinking, or can result in key messages/developments being missed. 


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