Do Boards need better governance?

Chess

This week, the Financial Reporting Council released its annual report.

The Council, which ‘promotes high quality corporate governance and reporting to foster investment’, released Developments in Corporate Governance and Stewardship 2016 against – in its words, ‘a backdrop of falling public trust in business’.

The report highlights the role the Council thinks Boards should play in setting, driving and reviewing corporate behaviours and culture.

Key points from the report:

  • Compliance with the principles of the UK Corporate Governance Code remains high; the number of FTSE 350 companies reporting full compliance with all provisions has increased from 57% to 62%. 90% report full compliance with all but one or two of the Code’s provisions. 
  • But if Boards choose not to follow the Code’s provisions, the explanations they give for doing so are often ‘of poor quality’.
  • The FRC believes this indicates that some are simply paying lip service to the needs of their shareholders and other stakeholders.
  • More focused reporting by Boards on how they carry out their responsibilities is needed – and the FRC has asked the government if it can have more oversight powers to help achieve this.
  • A review of 2016 AGMs highlighted the need for greater transparency on the link between executive pay and performance.
  • Succession planning and diversity is another area where companies could do better.
  • There’s a need for nomination committees to make the link between Board composition and company strategy, to ensure the diversity of skills needed to deliver success.

What are the implications?

The vast majority of companies are meeting most or all of the standards required of them. But where these standards are not being met, the reasons given for non-compliance are often poor.

The report implies that there may be more pressure in future to provide narrative on how Board responsibilities are discharged.

And there is a clear call for improvement in Board composition, with succession planning and diversity both cited as areas where performance could be improved. In addition, the need for nomination committees to think more about future strategy when selecting potential directors should see composition more closely allied to corporate priorities.

How should companies respond?

For the majority, the report’s findings will be of interest rather than immediate concern. But there are steps you can take to ensure you meet the Council’s requirements in future:

  • Familiarise yourself with the provisions of the Corporate Governance Code. Make sure you are meeting its standards – or that you have solid reasons as to why you have deviated from them.
  • Provide comprehensive reporting on the way you carry out your responsibilities. Make sure you are on the front foot in the face of potential increased powers for the Council.
  • Strive for transparency when it comes to executive remuneration decisions, and make clear the links between performance and pay.
  • Put in place a robust succession plan. Make sure the Board’s current composition and any plans for new members are aligned with future business strategy.
  • Make sure your meetings run as efficiently as possible. Clear minutes, professional papers and clearly-documented actions are vital to a well-run Board or Committee. Less time on admin means more time to deliver the reporting the Council is looking for, as well as ensuring any decisions are discussed fully and the right governance standards are maintained.

If you want tips on how to improve efficiency when preparing for and running your meetings, you can read a case study about Board Portals and what's in it for directors. You can download a free copy here.

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