Looking for the bright side of a banking explosion

In reaction to the banking crisis which began in 2007, Sir David Walker’s final report on the governance of banks and other financial institutions was published in November 2009.

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The Report contained a number of corporate governance recommendations, which were taken by the FRC as input for a more timely review of best practice for the wider community of listed companies.

Sir David Walkers original report looked at flaws in corporate governance within banks and large financial institutions, following the failures within the banking system. Whilst the report highlighted that better governance would not prevent another disaster, it would reduce its likelihood. Pointing out that changes needed to be primarily behavioural not organisational, the report covered and made recommendations in the following areas:

  • the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
  • the balance of skills, experience and independence required on the boards of UK banking institutions;
  • the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
  • the role of institutional shareholders in engaging effectively with companies and monitoring of Boards;
  • and whether the UK approach is consistent with international practice and how national and international best practice can be promulgated.

In reviewing the then ‘Combined Code’ the FRC took some guidance from the Walker report when issuing a revised draft of the ‘UK Corporate Governance Code’ in December 2009. The fundamental approach of comply or explain was maintained protecting the principles-based system of control. These principles form a more comprehensive mechanism when put into context with the legislative requirements of the Companies Act 2006 and market incentives.

The UK Corporate Governance Code sets out its main principles around five key areas: Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders. Implementation of the review recommendations has had subtle impact on each of these areas.

What are some of the practical things to do in the Annual Report?

Within the design and presentation, companies should try to link all the key aspects of the recommendations throughout the Corporate Governance section. Where existing provisions are appropriate, but not compliant with the code, you should ‘explain’ your reason for non-compliance.

Evidencing good corporate governance within any Annual Report is extremely important. By using simple and easy to understand presentation methods you can communicate good governance that will embue confidence in the various consumers of the information.

Risk

A simple framework in presenting risk management will provide a clear understandable structure to the reader. Support your narrative with flow charts and diagrams that clearly explain the processes, responsibilities and risk appetite clearly linking risk to strategy, KPIs and compensation.

Risk Management can be complicated and open to interpretation: describe the reason why a particular risk is being monitored, how it is being managed and whether that risk has materialised during the year.

Board Composition

A more structured approach to board biographies can highlight and promote good board composition. Use simple and straightforward titles around experience, other external appointments, qualifications, skills, independence, committees and roles within the make-up of the Board. Clearly indicate responsibilities and strengths to the composition of the Board. The revised code also gives guidance on Board evaluation and effectiveness reviews.

Compensation Link

Present a clear link between good performance and reward and how these expectations are arrived at. Use charts and diagrams to highlight key practices around Board performance evaluation, commitment, succession planning and important areas of focus during the year.

General Reporting on Corporate Governance

A well written ‘letter from the Chairman’ provides an overview of the performance of the Board and gives information on both the achievements and areas of concern during the year. Ensure that the various Committee reports are clearly owned by their respective Chairs, with personal introductions and commentary.

If you are looking to develop your corporate governance reporting, benchmark your report against either your peers, ‘best in class’ or even international companies that are reporting on more stringent regulation.

Corporate Governance and Corporate Social Responsibility

Good Governance should also be entwined into overall CSR objectives. Companies that are genuinely trying to be environmentally and socially responsible will have CSR objectives as an integral part of their overall Group strategy and should equally report on good Governance within this area.

Keeping it Contemporary

Whilst the report should be sufficiently comprehensive, there will no doubt be levels of detail it is impractical if not undesirable to regurgitate year after year. The solution to this should be your corporate website which must be seen as the definitive source of comprehensive contemporary knowledge. It’s easy to keep on top of, easy to refer shareholders to and totally within your control.

Conclusion

Changes made within the new UK Corporate Governance Code are designed to ensure that the boards of public companies are acting responsibly and in the interests of all stakeholders. Sir David Walker’s final report on the governance of banks and other financial institutions highlighted areas of improvement that should provide additional areas of focus when looking at Corporate Governance as a whole. Since the Walker Report, various reviews have taken place and some are ongoing. Looking into gender diversity based upon Lord Davies’ ‘Women on Boards’ report published in February 2011 and the more recent Audit Committee work, all reviews can be found on the frc website.

Summary

The topic of Corporate Governance is vast - a dialogue with a Jones and Palmer Consultant could help you ‘punch above your weight’, and provide valuable information,  helping to move away from boilerplate reporting to a form more relevant and engaging for the company.

At Jones and Palmer we look to engage with our clients to improve the reporting of good Corporate Governance practice. Perhaps ideas generated from some of our key messaging sessions will help your business enhance internal controls and make your Annual Report and investor communications stand out from the crowd.