Our 12th annual corporate governance review finds encouraging signs of improved governance practices but companies must maintain their momentum as regulation increases.
The trends below are just a few of those discussed in Simon Lowe’s executive summary in Grant Thornton’s annual FTSE 350 Corporate Governance Review. The report analyses the annual reports of 298 of the UK’s FTSE 350 companies with years ending between June 2012 and April 2013.
The full report is available to download: Corporate Governance Review 2013 – Governance steps up a gear.
Personal accountability – the year of the chairman
One of the key trends of our 2012 report was the link between good governance and the values as discussed by the chairman in his or her primary statement. While this year that trend appears to have stalled, there has been a shift in the number of board and committee chairmen reporting personally in the governance section.
In response to increasing pressure for more transparency from investors and the media, 60% of chairmen now introduce the governance statement. For the committees, personal accountability has also been on the rise, led – perhaps unsurprisingly – by the remuneration committee where 70% (2012: 50%) now give a personal introduction.
A new structure for narrative reporting
The new requirements introduced in the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (PDF) came into effect for year-ends after 30 September 2013. The regulations introduced the requirement for a strategic report section. This will contain information already in the annual report, as well as additional information such as greenhouse gas emissions and gender diversity.
The primary challenge for firms is to make the way they present that information more forward-looking. In setting out their strategy and business model, companies will need to discuss their future activities rather than simply reviewing performance over the previous year. Disclosures should demonstrate why the business model is sustainable in the longer term, how it will generate value for the investor, and how the business model links to principal risks.
Our research suggests that companies have much work to do in order to adopt the new reporting regulations. We found that only 16% of companies had anticipated this change in regulation and provided a description of their business model and how it linked to their risks, future plans and key performance indicators.
Risk and control
Companies are required to discuss risk management and internal control arrangements in the annual report. Our research has found that although companies state what their arrangements are, most don’t demonstrate how and why they are effective. The ‘so what’ factor is clearly missing and, in our view, this doesn’t provide enough transparency to demonstrate to investors that the business is on top of its risks.
The research also found that companies provide shareholders with limited information on how they evaluate their risk management and internal control, with only 27% of the FTSE 350 providing real insight into how they review the effectiveness of their internal control systems, showing no improvement year on year.
As our Evolution of Governance animation shows, there has been considerable regulation over the past 20 years and there is more on the horizon.
Indeed, to address some of the issues highlighted here, this year the FRC will publish guidance on Risk Management, Internal Control and the Going Concern Basis of Accounting, which will take effect on 1 October 2014. This is in response to consistently weak reporting on these areas and will require companies to improve disclosures.
Companies need to ensure that they can keep pace with this change and look to future-proof their companies where possible as the regulatory environment continues to evolve.
Source: Grant Thronton