February 12, 2014 Moving beyond compliance
In his foreword to the Grant Thornton Corporate Governance Review 2013, the FRC’s Executive Director of Strategy, Chris Hodge, commented that whilst the rise in the number of companies which comply with the UK Corporate Governance code is good news, to keep up the momentum UK businesses need to move beyond compliance. This call to step beyond regulation is not unique to the FRC and in fact we have previously commented on the FCA’s moves to shift the financial services industry away from the ethics of obedience and towards “the ethics of care and the ethics of reason.”
Aside from this, the picture revealed by the Grant Thornton is one of increased compliance with 57% of companies claiming full compliance with the code and 85% of the remainder only failing in one or two areas. Following on from a plateau evidenced in 2012, the report says that this increased level of compliance “represents a step change.” Citing a wave of new guidance and regulation as potential drivers for this change, the report highlights key factors including increased shareholder scrutiny, pending legislation on executive remuneration and the introduction of the 2012 Code and Strategic Review Regulation.
By far the most common area of non-compliance (12.8%) relates to having insufficient independent directors on the board. Although this is an improvement on the 18.6% reported in 2012, companies which fail to meet this requirement are in breach of one of the governance code’s main principles, namely:
“The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their duties and responsibilities effectively.”
Other non compliant areas include failure to meet the remuneration committee membership criteria (6.7%), combining the roles of chairman and chief executive (5.7%) and the chairman not meeting the independence criteria on appointment (5.0%).
The growing acknowledgement of the importance of corporate governance is perhaps evidenced by that fact that the average governance statement now stands at 19.1 pages. Despite that the report concludes that there is still some room for improvement. The quality of reporting, particularly with regard to transparency is singled out as a cause of regulatory concern “not least when it comes to the interpretation and application of the cornerstone of governance – the ‘explain’ in ‘comply or explain.’” This lack of clarity seems to be greatest within the FTSE 250 companies with the regulator concluding that they seem “less able to tell their story or give a clear explanation of what they are doing in practice.”
The days in which corporations could operate behind closed doors are long gone. What this report illustrates is that even when regulatory guidance is followed, unless a corporation can clearly articulate both its actions and the reasons behind its actions it could still be found to be lacking. Moving beyond compliance requires a visionary shift which embraces open accountability and governance.