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Fresh approach to corporate governance needed - IoD

17 Jun 2015

Whether it’s a multi-million pound accounting error at Britain’s largest supermarket chain, shareholder revolts over hefty pay-outs for FTSE executives, or corruption at the body which oversees world football, it’s never been more obvious that corporate governance matters. Unfortunately, the UK’s current approach to identifying what makes for good governance is flawed, a new report – The Great Governance Debate – Towards a Good Governance Index for Listed Companies – by the Institute of Directors claims today.

Ken Olisa, Chairman of the advisory panel for the report, warned that it was wrong to rely on regulators, whose focus is inevitably on compliance, to improve governance at the UK’s biggest companies:

“Identifying symptoms of governance failures, and then drawing up check lists to eradicate them leaves us in the position of always fighting the last battle. The financial crisis was not caused by a lack of rules, it was caused by behaviour which was clearly egregious to any outside observer. Unfortunately the UK seems to have learned little since the crisis, sticking to a prescriptive set of attributes aimed at creating the cardboard cut-out perfect company.

“At least the comply or explain principle recognises that business circumstances are different, but we need to go one step further and accept that even if all listed companies were 100 per cent compliant with the corporate governance code this would not prevent future scandals, failures or collapses. A false sense of security created by compliance is no security at all.

“One of the key findings of our new research is that no one factor dictates whether a company is well-run, whether that’s the number of non-executives on a board or how often the auditor is changed. It is simply not correct for a company to say that because they have ticked certain boxes, they show good governance.

“Now is the time for some bold thinking on how we define and measure governance, including the recognition that it is essentially an organic process involving the interaction of groups of people. The IoD intends to lead the way in creating a better way of looking at governance that gives investors, employees and the wider public greater confidence in the transparency and accountability of our biggest companies.”

The report takes a fresh look at what board practices actually matter, and for the first time, combines external perceptions of whether a company is well-run with the objective factors normally used to judge good governance.

Simon Walker, Director General of the Institute Of Directors, explained the motivation behind the report:

“The reputation of corporate Britain took an almighty kicking during the financial crisis, and several years later, is still on its knees. Any attempt to restore public faith in business must start with good corporate governance, but focussing solely on how companies report compliance with a framework, while not looking at underlying behaviour, will simply not do the job. This report challenges previous ways of measuring the governance of big companies, and kicks off a new debate on how firms can improve their transparency, accountability and performance.”

The IoD, in association with Cass Business School, has set itself the task of ultimately creating a robust index that does not encourage box-ticking and will stay reliable as the economy and business change over time. The panel overseeing the project looked at instrumental governance factors including business performance, audit arrangements, directors’ pay and shareholder relations, and undertook a survey of business people’s perceptions of the UK’s biggest companies.

In a new approach, the panel then combined this information in an attempt to achieve a more impartial and deeper understanding of the governance of these companies. This is an important step towards creating an index of listed companies which will aid investors and directors in their decision-making.

The full report can be downloaded here.

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