The 2017 Good Governance Report The great governance debate continued Supported by Good Governance Report Contents Page Executive summary 4 Preface from the Institute of Directors 6 Supporting statement from the Chartered 8 Quality Institute Foreword from Cass Business School 9 Introduction to the report 10 Overview of methodology and results 11 Table 1: Full list of 2017 GGI scores by company 12 Selection of corporate governance indicators 14 Table 2: Full list of corporate governance indicators 16 and their justification Calculating the Good Governance Index 18 Appendix 1: Data sources for corporate governance 22 indicators Appendix 2: Company scores in each of the five 24 corporate governance categories Advisory panel 26 Acknowledgements 29 3 Good Governance Report Executive summary • The IoD Good Governance Index (GGI) is an • For 2017, the highest GGI scores are achieved innovative way for external stakeholders to by Diageo, Aviva, GKN, Barclays, Smiths Group, assess the overall standard of corporate Prudential, RSA Insurance Group, International governance at the largest UK-listed companies. Consolidated Airlines Group, InterContinental Launched in 2015, it is now in its third year. Hotels Group and Compass Group. We find no The GGI initiative is an important component particular correlation between the GGI score of the IoD’s Royal Charter commitment to and company size. However, the average score promote the study, research and development of companies from the energy and utilities of corporate governance. sectors is significantly higher than the overall GGI mean score. In contrast, the average score • The GGI is intended to stimulate an ongoing of the information technology sector is debate about the importance of good corporate significantly lower. governance and how it can be measured and improved. Going forward, we would like to • A unique feature of the GGI methodology is that broaden the scope of this debate beyond a stakeholder survey of governance perceptions the largest listed companies and consider is used to calculate the weights that are applied how our findings can be applied to other kinds to each governance category in the calculation of organisation. Consequently, the intended of final company scores. This contrasts with readership of this report encompasses anyone the approach used by many other corporate with an interest in the design and application governance indices, which attach equal weight of sound corporate governance. to each individual indicator. As a result, our methodology is less vulnerable to manipulation • The GGI is calculated by looking at how and attaches greater importance to those companies score across 47 governance indicators that exert the greatest impact indicators. These indicators are grouped into on external governance perceptions. five broad categories of corporate governance: Board Effectiveness; Audit and Risk/External • Among our five categories of corporate Accountability; Remuneration and Reward; governance, those indicators measuring Shareholder Relations; and Stakeholder Audit and Risk/External Accountability Relations. Specific indicators are chosen are most strongly correlated with external in order to reflect a broad conception of governance perceptions. Those indicators corporate governance which not only takes seeking to measure Board Effectiveness are into account the interests of shareholders but the least correlated. This finding may reflect also considers how governance is working for the importance placed by stakeholders on the other key stakeholders. robustness of risk governance systems at the current time. It may also suggest that we must • The indicators included in the GGI are selected continue with our efforts to identify insightful by an advisory panel of leading corporate indicators which better capture the crucial governance experts from both within and contribution to good governance provided outside the IoD. The panel is chaired by Ken by boards of directors. Olisa, the deputy chair of the IoD. In addition, the design and publication of the GGI is supported by two partner institutions: Cass Business School, who serve as academic advisors, and the Chartered Quality Institute (CQI), who bring an operational perspective to the GGI’s development. In 2017, the number of indicators included in the Index increased from 34 to 47, reflecting the advisory panel’s efforts to widen the scope of corporate behaviour captured by the GGI. 4 Good Governance Report Preface from the Institute of Directors by Ken Olisa OBE, chairman of the advisory panel and deputy chair, IoD Welcome to the Good Governance Report, the • Extending application of the UK Corporate Institute of Directors' third annual corporate Governance Code beyond listed companies governance ranking of the top UK companies. to encompass large private businesses Two years ago, the IoD launched the Great Although this activity has been welcome, it is Governance Debate with the twin objectives of: a matter of regret that the bulk of the focus has been not on the broad complexities of corporate • Fulfilling our Royal Charter obligation to promote governance, but on the narrower matter of development of the law and practice of UK compliance with societally acceptable norms of corporate governance behaviour. Just as the original Combined Code • Ensuring that the debate was led by grew out of a reaction to the Maxwell, BCCI and practitioners – directors – rather than policy Polly Peck accounting scandals, today’s policy specialists, professional advisors and legislators makers focus on tackling issues which are considered to be bad business conduct. Twenty-four months later, while we can chalk up significant success on the first objective, we still Closing the stable door after the horse has bolted have much work to do on the second. is legitimate if it prevents a stampede but it doesn’t begin to address the underlying causes Admittedly, although it is a topic which has rarely of failure which, in the case of boards, is the been out of the headlines since we first set about breakdown of the system of control and direction. creating a way to rank the UK’s top companies’ performance, the IoD can’t really claim credit for The legislators’ single-mindedness is underlined by the recent and unprecedented interest in the prime minister’s preface to the government’s corporate governance. green paper response, in which she said: Instead the minds of parliamentarians, “We have also seen worrying evidence that a shareholders, employee organisations and the small minority of our companies are falling short media have been concentrated by market events of the high standards we expect. I want to tackle such as the collapse of BHS, Sports Direct’s these problems and strengthen people’s faith in continuing battles and the mooted listing of five a well-regulated free market economy.” per cent of Saudi Aramco coupled with a rumbling While not in any way dismissing the importance of undercurrent of rebellions over boardroom pay. addressing that “worrying lack of trust”, the IoD’s One of the biggest interventions came from the approach to good governance has a higher-order Department for Business, Energy and Industrial objective. We aren’t in the business of adding to Strategy select committee which, having conducted regulation and its inevitable conclusion that one an exhaustive and detailed inquiry, published their size fits all. Rather, we have set about identifying recommendations in an April 2017 report: a set of instrumental factors which every board should seek to optimise in order to achieve “British businesses must act on corporate competitive advantage for their business. governance, executive pay including long-term incentive plans, and boardroom diversity to Our starting point is the law. The 2006 Companies maintain the country's strong international Act requires directors to act in the way they standing in corporate governance and address consider, in good faith, would be most likely to a worrying lack of trust of business among promote the success of the company for the the public.” benefit of its shareholders as a whole and, in doing so, have regard to the long-term impact In parallel, the government responded to concerns of their decisions on a wide range of stakeholders. about that “worrying lack of trust” with a green Effective governance is a prerequisite to this paper and a manifesto pledge which has resulted – not when viewed through the lens of those in proposed legislation to address three priorities: who promote box-ticking compliance but rather • Executive pay as defined in the UK’s seminal review of the • Strengthening the boardroom voice of subject, the Cadbury Report, published in 1992: stakeholders, especially that of employees “Corporate governance is the system by which 6 Good Governance Report companies are directed and controlled. The is a simplification of a complex set of interactions responsibilities of the board include setting which in aggregate will produce a result. The the company’s strategic aims, providing the same is true in the Good Governance Index. leadership to put them into effect, supervising From any board’s perspective, the GGI’s power the management of the business and reporting comes not from any intra-league comparisons, to shareholders on their stewardship.” but by a thoughtful analysis of the 47 instrumental factors and their relevance to their own What we, the practitioners, are seeking to achieve competitive position. is a better understanding of the behavioural