16 February 2015
The ICSA policy team and judges of the Excellence in Governance Awards identify examples of corporate reporting good practice in FTSE 350 companies
Good board disclosure clearly and concisely explains how it exercises its stewardship responsibilities on behalf of investors, ensuring that its members comply with the statutory duty of directors to ‘promote the success of the company for the benefit of its members as a whole’. This includes discussion of the role of the chairman and board in leading the company and promoting an appropriate culture; the activities of the board as a whole and of its various committees, with a particular focus on board refreshment, diversity and succession planning; and the effectiveness of the board, supported by board evaluation. This is a personal aspect of corporate reporting – much will depend on the culture of the company and the personality of the chairman – and so it is unsurprising that companies tackled board disclosure in a variety of ways.
The better reports showed clear evidence of the chairman taking personal responsibility for leading the company, explaining how he or she leads the board and ensures that the culture of the company is appropriate. Most companies commenced their strategic report with a statement from the chairman, which generally created a positive impression – although some were better written than others.
Some companies however failed to link the chairman’s statement with the rest of the governance report and made it seem almost a separate paper. Personality and the personal touch counts for a lot – in one case the chairman’s statement slipped from ‘I’ to ‘we’ to ‘your company’ within the first page – even if the chairman did not write it personally, it is better to make it look as if he or she did. Examples of good practice:
Investors are interested in understanding what the board actually does. For example, how many meetings did they have; what did they discuss; and how do the issues discussed by the board relate to the corporate strategy? The best reports therefore included a discussion of the specific issues considered by the board and its committees and, in particular, those issues where there has been active debate. These will almost always be about judgement issues and the report should demonstrate how the board challenged the management approach. Companies should also consider explaining why the number of board and board committee meetings that they held was the right number – some companies had relatively few meetings, which suggests a lack of oversight and requires some explanation. The same would apply if there were a lot of meetings, as that might imply that there are issues. One effective way of dealing with this was a summary of the headline agenda items for each meeting.
If you have had a major issue in the course of the year, investors will have noted it and will see how you report it. If it is not mentioned, or glossed over, that will set alarm bells ringing. A number of companies should have been more open about particular ‘problems’ in the year under report. Investors will appreciate companies demonstrating that the board is active in resolving the issue. Finally, too many companies ignored the role of the company secretary. Some examples of good practice:
Previous articles have explored good practice audit and risk reporting and remuneration reporting (see February issue of Governance + Compliance). The following review will therefore concentrate on the report of the nomination committee.
The nomination committee may be considered the ‘Cinderella’ committee of the board – in recent years there has been a considerable focus on the role of the audit and remuneration committees over that of nomination, despite its responsibility for selecting the individuals that are proposed for service on the other committees.
This report should discuss the mix of skills and other attributes on the board – including how any gaps are likely to be filled and looking at diversity in its widest sense – with clear evidence of succession planning. There should be some description of the skills and capabilities required and/or obtained in the course of board refreshment and an explanation of why these are important to the board and company’s strategic purpose. When providing biographical details of existing board members, it is helpful to discuss what each director brings to the board and give specific reasons why they should be re-elected. Examples of good practice include:
There were times when the reporting of board evaluation felt like pulling teeth, with some companies seeming to say as little as they thought they could get away with on the subject. No-one expects a company to report that the board are at each others’ throats at every board meeting but it should not be so difficult to achieve more flavour of what was done, what the outcomes were and – perhaps most importantly – what has been done following the previous review. Examples of good practice:
Peter Swabey is Policy and Research Director at ICSA