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The 2016 Good Governance Report the Great Governance Debate Continued IoD Report September 2016 The 2016 Good Governance Report The great governance debate continued Supported by Good Governance Contents Page 1. Preface from the Institute of Directors 4 2. Supporting statement from the Chartered 6 Quality Institute 3. Foreword from Cass Business School 7 4. Executive summary 8 5. Methodology and approach 10 6. Econometric results 12 7. A model score 14 8. Interim conclusions and next steps 15 9. References and acknowledgements 16 10. Appendix A: Full ranking 18 11. Appendix B: Explanation of the methodology 20 11.2 Perception survey and corporate governance scores 22 12. Advisory panel 30 Acknowledgements 34 1 Preface from the Institute of Directors by Ken Olisa OBE, deputy chair IoD, chairman of the advisory panel For more than 25 years, corporate governance has policymakers increasingly turn their attention to Our aim was to stimulate a robust debate about Like the FRC’s recent report on corporate culture, been a hotly debated topic, with the policy the role and conduct of business within society. the nature and calibration of good governance. the IoD’s aim is to provide directors with an community and consultants leading the way in understanding of the many factors that combine In the UK, the House of Commons’ Business, And we certainly achieved our objective! In a these deliberations. But no more. to determine good governance, so enabling them Innovation and Skills select committee has manner redolent of my school days I was to configure their organisations in ways which suit In 1992, the Cadbury Committee’s report laid the investigated and criticised the corporate summoned to the offices of several chairs of their strategic purpose. foundations for a more practical approach to the governance of a range of household names. And leading UK companies to explain myself and the subject. the theme of “health and trust for the good of all” IoD’s methodology. It is for them to record how We hold that good governance isn’t a question of became prominent when changes to corporate well we fared, but from an IoD perspective, I meeting minimum requirements but rather it is the As the world’s first known report on the subject, governance formed a major plank of Theresa May’s believe that we gave a good account of ourselves, consequence of tuning many variables to produce Cadbury was the response to a series of corporate campaign en route to her becoming prime minister. refined our approach to the measurement optimal performance. scandals – Maxwell, Polly Peck and BCCI – in which Ken Olisa, OBE methods and reinforced confidence in both the customers, shareholders and pensioners had been Across the Atlantic, after a long period when Last year I compared governance to health. As importance of corporate governance and – more Deputy chair, IoD, robbed of millions of pounds. Its focus was, not corporate governance was either not discussed at anyone who has had a general blood test will importantly – its complex, organic nature. and chairman of the unreasonably, on the quality of financial reporting all or left to regulators such as the SEC, things have know, it is the aggregate effect of many small advisory panel and the veracity of a company’s published shifted tectonically. Reminding us that corporate For this second report, we have continued our elements which determines one’s wellbeing, not accounts. As a result, Cadbury confined itself to governance is a matter of national competitive successful partnership with Cass Business School compliance with just one or two headline factors. those relatively technical aspects of corporate advantage, in July, a panel of heavyweight US and, as they explain in their foreword, we have The comparison has survived this year’s refined governance related to accounts and accountability. executives launched a set of “common sense refined our methodological approach. Specifically: approach. Boards concerned with good corporate governance principles” outlining The Cadbury recommendations were incorporated • We are using a refreshed list of indicators that governance will find the following pages filled with recommendations for the effective management into the Combined Code which, though it has assesses factors well beyond simple compliance useful pointers to the identification and of corporations for long-term prosperity. In their changed its name to the UK Corporate with the UK code assessment of what makes a well-governed open letter, the authors (who include Berkshire Governance Code, has stayed true to its roots and company tick. Hathaway’s Warren Buffett and JP Morgan’s Jamie • The Perception Survey from which we derive the is still administered by the Financial Reporting Dimon) reminded the reader that the health of, and list of instrumental factors is based on a wider But perhaps the most important message is that it Council (FRC). trust in, public corporations and financial markets and arguably more expert set of commentators. is practitioners, not experts, who need to The FRC’s raison d’être is to promote high-quality is critical to economic growth and the financial It is used to identify correlations between appreciate the messages within this research. corporate governance and reporting to foster experts’ perceptions of good governance and futures of employees, retirees and investors. For the first time ever, corporate governance has investment. But even the FRC has recognised that objectively measurable factors It is against this backdrop that the IoD is delighted become a hot topic of conversation for legislators, if the UK Governance Code is to achieve its stated to publish our second research paper on the • The weights assigned to the individual regulators and the general public on both sides of objective of promoting the long-term success of practitioners’ answers to two key questions: components are inferred on the basis of surveys the Atlantic. companies, then it needs to encourage boards to of customer, investor and employee assessments focus more strongly on the governance of the • What is good corporate governance? It is, of course, important to note that in this report of the quality of the corporate governance culture and behaviours of the organisations of • How do we measure it? we are not trying to prescribe one precise route to regime of the rated companies which they are stewards. As such, the FRC governance, but to further understanding of the A year ago we launched our research report, recently launched a report exploring the • We have been much clearer in our explanation of factors which, taken together, contribute to good The Great Governance Debate: Towards a good relationship between corporate culture and how the rankings are produced governance. We hope that this will lead to boards governance index for listed companies, which long-term business success in the UK. discussing and agreeing which of these factors examined the issue from the standpoint of The result is a workable hypothesis describing require focus in their organisation in order to Today, corporate governance priorities bear little company directors and investors, rather than (within the limits of what can currently be optimise governance. resemblance to those which exercised Sir Adrian academics or regulators. measured) what constitutes good corporate Cadbury and his colleagues. The quality of governance and how the many variables can be I do hope that you find this research of practical Our main finding was that governance was financial reporting has been tackled by many measured and judged. use and that you will join us for Round Two as the organic, rather than mechanical. IoD leads the Great Governance Debate. regulatory bodies around the world and, as a This is a very long way from the currently Using the definitions provided by the UK consequence, the centre of gravity has shifted widespread box-ticking regulatory approach to Thank you. Corporate Governance Code and Companies Act towards gaining an understanding of what makes the topic. The FRC does of course allow for we developed a simple model which presented an effective corporate body tick. Issues such as “explanations”. Nevertheless, due to its focus on some 50 variables in a way which enabled a gender and ethnic diversity, corporate culture and the UK code, many FTSE 100 companies see ranking of the FTSE 100. The instrumental factors stakeholder engagement now find themselves governance in pure compliance terms and it has used in the ranking were drawn from a pool of under the governance microscope. mainly been reduced to the production of informed commentators (directors, company Actually, ‘microscope’ is a poor metaphor: a better boilerplate paragraphs in annual reports. secretaries, academics, etc) and then applied as Ken Olisa one might be ‘cross hairs’, as politicians and other objectively as possible. Deputy chair, IoD, chairman of the advisory panel 4 5 2 Supporting statement 3 Foreword from Cass Business School from the Chartered Quality Institute by Professor Andrew Clare, by Estelle Clark Dr Nicholas Motson and Professor Paolo Volpin The IoD has initiated a vital debate around The Chartered Quality Institute (CQI) and its Over the past 20 years, academics1 and We believe that our approach is an important step governance. A common criticism of the UK community of 20,000 quality professional practitioners2 have made several attempts at forward in trying to assess the importance of CG Corporate Governance Code is that it has led to business partners exist to provide that insight and producing corporate governance (CG) indices, so risk factors and, we hope, an important compliance with a limited set of mechanistic confidence through a closed-loop system of far with limited success. Existing indices have contribution to the Great Governance Debate. corporate governance factors and has ceased to operational governance, assurance and often been criticised for adopting a kitchen-sink provide the level of confidence in performance improvement.
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