The boards of Britain’s biggest companies face a stiff challenge in rebuilding trust after a year of reputational blows, the Institute of Directors said today, launching the second installment of its annual review of corporate governance.
The 2016 Good Governance Report published with the support of Cass Business School and the Chartered Quality Institute, assesses companies by combining traditional governance indicators with the perceptions of investors and business leaders. The report follows recent parliamentary inquiries into BHS and Sports Direct, which accused both firms of governance failings, and pledges from Theresa May to shake up board composition and clamp down on executive pay.
2016 Good Governance Report
Ken Olisa, Chairman of the report’s advisory panel, explained the IoD’s intention in publishing the 2016 Good Governance Report:
“This has been a difficult year for business, with MPs lambasting the directors of major high street brands, and the Prime Minister making clear that corporate boards are in her crosshairs. This all came hot on the heels of the EU referendum, during which big companies were often presented as the bad guys. This is bad for business and bad for the country – business is a part of our society not apart from it. Given the mood music, it has never been more important that directors understand what good governance looks like, and what practical measures can be taken to improve and to convince the outside world they are delivering it
“With our first report last year we kicked-off a broad discussion on governance. We have refined the methodology and are getting closer to our aim to provide an all-round health check for FTSE boards, based on an array of drivers. Good governance is organic, so falling down on one or two points does not necessarily mean there is a problem. In order to perform well in our rankings, companies have to score well across a range of areas, including board structure, financial performance, remuneration and transparency.
“Despite the setbacks corporate Britain has endured this year, it still has an enviable global reputation for good governance. The range between the top and bottom companies on our list is narrow, indicating that directors could improve their governance substantially by focusing on limited problem areas.”
Good governance rankings
The IoD study ranks the 100 largest companies listed on the London Stock Exchange as of 31 March 2016 on the basis of their corporate governance (excluding companies for which there was too little data). The index is the only one of its kind to combine measurable factors with the views of investors, business leaders and governance professionals.
The study looked at 34 factors across five areas of corporate governance: board effectiveness, audit and risk/external accountability, remuneration and reward, shareholder relations and stakeholder relations (full list on page 24 of the report). The choice of factors is guided by the UK Corporate Governance Code and the Companies Act 2016.
Alongside the measurable factors, the IoD ran a survey that produced 1,977 ratings of companies on their corporate governance, from 744 individual respondents. The responses were drawn from members of the Institute of Directors, the Institute of Chartered Accountants in England in Wales, the Institute of Chartered Secretaries and Administrators, FTSE 350 company secretaries and other governance and investment professionals (more information on the survey can be found on pages 22-23).
The survey reveals which factors are the most important in the eyes of informed observers, giving a rounded picture of good governance. The relative weights of the different governance factors were determined through regression analysis (more information on the methodology available on page 12).
||British American Tobacco Plc
||Sage Group Plc
|| Next Plc
|| Kingfisher Plc
|| DS Smith Plc
|| United Utilities Group Plc
|| Royal Mail Plc
|| Admiral Group Plc
The full table is available on pages 18-19 of the report.
Note: the methodology has been changed since last year’s Good Governance Report, so these rankings are not comparable.
Estelle Clark, head of profession at the Chartered Quality Institute, and member of the advisory panel for the report, added:
“Now in its second year, the IoD’s Good Governance Index has moved Britain’s corporate governance debate into the centre stage of public discourse. As sponsors of the report, the CQI strongly advocates a revolution in the way that corporate governance is perceived and embraced, lest shareholders and the wider public become increasingly dissatisfied with the current state of affairs.
“Good governance, alongside improvement and assurance, will unshackle a business from the limitations that prevents it from fulfilling its potential. To prevent quality failure, a culture of continual improvement is necessary: ‘job done’ is not a phrase you will ever hear from a quality manager. Assurance means that good governance is embraced throughout a company, not just in the boardroom. After all, how can improvements exist if they live only in the minds of the board of directors?
“Operating without good governance equates to running a business on a hope and a prayer. In recent years, the public has looked on with barely contained contempt as countless examples of quality failure reach the front pages. Be it horsemeat appearing in beefburgers or software glitches depriving customers of access to their own money, the public, the shareholder and the consumer will no longer tolerate corporate governance that is anything less than outstanding.
“At the CQI we look forward to continuing to lead the conversation with the IoD, and making the difference in a field that affects every last one of us.”