September 9, 2016 Measuring good governance
What is good corporate governance and how do we measure it? Those are the questions which the Institute of Directors (IoD) set out to answer in their 2016 Good Governance report. Drawing on a combination of external sources and stakeholder perceptions the report ranks the corporate governance performance of the FTSE 100 companies.
So who are the winners and losers in the corporate governance stakes? British American Tobacco came top of the list, closely followed by Unilever and Diageo. BAT’s top ranking is particularly interesting because although it achieved a low perception score, not unusual in a tobacco company, other factors including board effectiveness and shareholder relations carried it to first place.
Whilst there is no one single factor which distinguishes those further down the rankings, executive pay, profit warnings and weak shareholder relations all seem to play their part. However, it has to be said that with the theoretical score range from 0 to 1000, the bottom score of 603 is still fairly well up the scale whilst the top score of 793 indicates that even in those organisations which are perceived to have relatively strong corporate governance there is still room for improvement.
In its report the IoD stresses that the robustness of its findings are dependent on the quality of the perception survey. This year’s report drew on 1,977 perception scores gathered from 744 individuals and the IoD intends to work to increase the representation sample further in next year’s report. Even so, the key findings are interesting and have implications for all companies.
Firstly, although all respondents were concerned with audit and risk/external accountability and saw them as the most important determinants of corporate governance, customers cared more about shareholder relations whilst investors and analysts were more concerned with stakeholder relations. When taken alongside the finding that measures of board effectiveness have little effect on stakeholder perceptions of corporate governance, the report is likely to open up the governance debate.
In their summary, the IoD suggests that responses could indicate that “simple compliance with the UK CG code is not enough to receive a high CG score as perceived by stakeholders.” In other words, there is a danger that companies may see governance purely in terms of a compliance tick box exercise rather than providing a strong basis for corporate actions which are in the interests of both the company and its stakeholders.
