The 2016 Good Governance Report
The Good Governance Report (“The Good Governance Initiative”) is the IoD’s flagship corporate governance publication which publicly ranks the FTSE 100 based on their corporate governance performance.
This report sets out the findings from extensive research into the measurement of corporate governance in UK-listed companies. Its purpose is to encourage the study of good governance among UK companies and stimulates public debate on the importance of corporate governance in rebuilding the reputation of the UK business community.
The purpose of this project is to reignite the governance debate by leading it away from the compliance approach to corporate governance that has become widespread in recent years. Our novel approach is to combine traditional governance indicators with a measure of the quality of corporate governance as perceived by stakeholders. We follow two different approaches to measuring the corporate governance of a given firm:
- We select a list of objective, measurable factors drawn from public sources
- We conduct a survey of stakeholders perceptions of corporate governance
The combination of these two components allows us to understand the relative importance of different governance factors as perceived by stakeholders. We then use the estimated model to build an index of corporate governance.
The results indicate that different components of corporate governance have different impacts on practitioners’ perceptions of it.
In other words, our methodology shows that the naïve approach of giving equal weights to different indicators (often adopted in the past) is inappropriate. Surprisingly, measures of Board Effectiveness have little effect on the perceived quality of corporate governance of a company. This is probably due to the fact that Board Effectiveness is hard to measure and that simple compliance with the UK CG code is not enough to receive a high CG score as perceived by stakeholders. Measures of the quality of Audit and Risk/External Accountability are the most important determinant of the perception of good corporate governance, followed by Shareholder Relations, then by Remuneration and Reward, then Stakeholder Relations, in that order.
The study also confirms that there is no agreement across stakeholders about the definition of good governance. Although measures of the quality of Audit and Risk/External Accountability are important across all types of respondents, different types of respondents emphasise different aspects of CG. Customers care about Audit and Risk/External Accountability and Shareholder Relations. Suppliers and media care about Audit and Risk/ External Accountability. Investors and analysts care both about Audit and Risk/External Accountability and Stakeholder Relations.