Initiatives to improve governance focus on empowering investors by providing better information. After all, the best governance system in the world won’t work without active investors.
Corporate exposure
Directors should focus on giving investors information to assess the company’s core business strategies when preparing an Operating and Financial Review, before considering how to reflect the broader interests of other stakeholders. Such is the advice of the Accounting Standards Board exposure draft of the new Reporting Standard, which was open for consultation until the end of February. The OFR should disclose “the resources, risks and uncertainties and relationships that may affect the entity’s long-term value”. So it must include information about significant relationships with other stakeholders only to the extent necessary to advise investors, where these are likely, directly or indirectly, to influence the performance of the business and its value.
The standard is accompanied by guidance from the ASB with suggestions of specific issues and indicators that might be included in an OFR. Examples include market share, sales per square foot, revenue from new products, customer churn, employee morale and health and safety, environmental impacts and social risks in the supply chain. Contact David Loweth, ASB 020 7611 9706 ( http://www.asb.org.uk)
Combined code review
Investors are having an increased dialogue with companies on corporate governance issues, and both believe the corporate governance climate has improved over the last twelve months, according to an informal assessment of the impact of the revised Combined Code published by the Financial Reporting Council on January 13. The FRC will carry out a formal assessment of how the Combined Code is being implemented during the second half of 2005. Contact Chris Hodge, FRC on 020 7492 2381 ( http://www.frc.org.uk)
Governance indices
The FTSE Group and Institutional Shareholder Services (ISS) have launched the Corporate Governance Index series, a set of six indices to select the best governed companies in the US and Europe. The indices, based on boardroom structure, executive compensation and takeover provisions, exclude such high profile companies as AstraZeneca, BMW, BSkyB, Ford and Viacom. They reflect mounting pressure on shareholders to invest in well-governed companies, which some investors believe can be correlated to strong financial performance. Contact Cheryl Gustitus, ISS 00 1 301 556 0538 ( http://www.issproxy.com)
Cracking the code
Nearly two-thirds of large companies are fully compliant with the combined code on corporate governance, while 94.6% of the top 350 UK companies (the FTSE 350) have established processes to monitor their social, environmental and ethical performance (SEE) compared with 43.1% last year, according to a recent survey. The survey, published by accountants Grant Thornton in December, finds that more than half (56%) of the top 250 UK companies (the FTSE 250) companies are now compliant with the code – a third more than last year. More than four-fifths (83%) of FTSE 100 companies are willing to outline their CSR and SEE performance as compared with 43.1% last year. Contact Colette Douglass, Grant Thornton 0870 991 2758 ( http://www.grant-thornton.co.uk)
Director’s chair
Women hold nearly a tenth (9.7%) of FTSE100 directorships, an increase of 1.1 percentage points on 2003, according to Female FTSE, a study published by the Cranfield School of Management on December 6. Centric and J Sainsbury jointly lead the way, with female directors accounting for a third of their boards. The annual assessment of women’s progress in the boardroom, scores companies on 13 measures of good governance, such as whether they review the composition and balance of the board, formally evaluate board performance and recruitment procedures for new directors. It found that those with the highest scores were significantly more likely to have at least one female director on the board. Contact Kate Enright, Cranfield School of Management 01234 754 425 ( http://www.ft.com/femalesftse)
A policy of openness
The TUC Shareholder Voting and Engagement Guidelines, published on January 10, call for the disclosure of pay levels throughout companies, emphasising that differences in pension plans for board members and the rest of staff should be made public. They set out policy on a range of corporate governance issues and strengthen the TUC’s work to develop a strong shareholder voice for the representatives of employee-owned capital in pension funds and other investment vehicles. Other issues covered include:
l board balance and diversity,
l director independence,
l auditing,
l corporate social responsibility.
Companies will, for example, be pressured to provide a breakdown of staff numbers by gender, race, age and disability and detail staff training and development programmes. The guidelines will be distributed to the TUC’s 1000 pension fund trustees, as well as companies in the FTSE 100 index. Contact Ben Hurley, TUC 020 7467 1248 ( http://www.tuc.org.uk)
Pragmatic governance
The National Association of Pension Funds has said that it will be more pragmatic when interpreting new corporate governance guidelines. It launched new voting guidance on January 20, urging its members – who control about a fifth of the shares on the UK stock market – to be more flexible in the way that they interpret some parts of the revised Combined Code on corporate governance. For instance, non-executive directors who have served more than the recommended maximum of nine years on the board could be allowed to continue in their roles, despite a clause in the 2003 revised code stating that non-executives should no longer be considered independent once they have served this long in the role. Contact Andy Fleming, NAPF 020 7808 1312 ( http://www.napf.co.uk)
Losing their grip
The power of non-executive directors to control executive directors’ pay and ensure compliance with corporate governance guidelines has declined, according to a recent survey by Independent Remuneration Solutions. The survey of 400 non-executive directors of fully-quoted companies revealed that just over half (55%) believed they had enough collective power to control a chairman or chief executive with a large stake in a company, down from over four-fifths (82%) two years ago. Contact Peter Brown, IRS 020 7836 5831 ( http://www.independentremuneration.co.uk)
Unregulated pay
The government has decided against new provisions on directors’ remuneration in the forthcoming Company Law Reform Bill, as a report from Deloitte and Touche suggests that current regulations are already bringing greater shareholder scrutiny to directors’ pay, resulting in improved dialogue between companies and shareholders. For example, all FTSE 350 companies put their remuneration report to a separate shareholder vote and in some cases changes in policy have been made as a direct result. More than nine-tenths of shareholders say communication has improved and companies are changing their remuneration policies and practices to reflect the link between pay and performance. Contact DTI 020 7215 5981 ( http://www.dti.gov.uk)
Rebel resolution
BAA is being forced to table a resolution at its AGM in July, which if passed would compel the company to seek shareholder approval for all major investments. The resolution, forced on BAA by rebel shareholders from the Stop Stansted Expansion campaign, seeks to introduce a new provision in the articles of the company. It would require the directors to obtain shareholder approval before proceeding with any investment whose aggregate cost – covering all phases of a project and adjusted for inflation – exceeded 50% of shareholders’ funds. Contact BAA 020 7932 6654 ( http://www.baa.com)
Lies Damned lies
Auditors who “knowingly and recklessly” give false opinions could face jail, under measures agreed in principle by ministers in a quid pro quo for limiting the big accounting firms’ liability. Under the proposals, shareholders would benefit from a series of measures giving them more information on the audit process. Contact DTI 020 7215 5000 ( http://www.dti.gov.uk)
Editorial Comment
We all know that bad governance, dodgy management and incompetent auditors can lead to failed companies (aka Enron, WorldCom et al). But does better governance lead to more successful companies? To really answer that question, best to wait five years to see if companies included in the new FTSE good governance index outperform the rest of the market.
For now, at least in the UK, the revised Combined Code, designed to improve investor confidence in standards of corporate governance, appears to be working, with investors reporting increased dialogue with companies and greater chairman involvement on governance issues. Some companies are already reporting in their 2004 annual reports, a year in advance of the need for compliance, how they stand in relation to the revised Combined Code.
However the best governance system in the world won’t work unless investors become more active and vote their shares. And that’s where the new OFR comes in. It aims to counteract the glossy optimism in the front half of many annual reports, with balanced, neutral, forward-looking assessments based on non-financial key performance indicators (KPIs). Armed with a better view, investors wanting a good long-term return can more effectively intervene, if they want to.
Mandatory social reporting, as the CORE Coalition wants, the new OFR is not. A helpful step along the road to responsible and successful investment, it hopefully is.
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