As a result of the continuing fallout from the financial crisis and the greater public focus on perceived corporate responsibility failure, 2014 again saw many small and mid-size companies encouraged to address continued shareholder activism and a keener focus on corporate governance. Regrettably however, this seems to have met with little or no change from previous years.
2014 saw further changes to the landscape in which boards of listed companies have had to operate as public perception translated into further regulation including the introduction of narrative reporting and the Strategic Report, changes to the UK Corporate Governance Code and the requirement for companies on the AIM market to disclose their corporate governance arrangements on their websites. The response appears to be mixed and therefore the jury is out.
End of year report
The Quoted Company Alliance and UHY Hacker Young recently published the results of their annual review of corporate governance behaviour for 2014. Their findings indicate that the level of corporate governance disclosure amongst small and mid-size quoted companies remains broadly consistent with 2013, with progress being made in some areas and regression in others.
The principal themes that emerged from the report include:
- a failure to link governance with strategy – many of the companies reviewed failed effectively to explain the link between their governance strategy and strategy for growth. If a company has difficulty articulating this link then it will be equally difficult for investors to recognise it;
- a failure to disclose board evaluation processes – many companies failed to adequately explain the role and responsibilities of their board members and the value they bring to the board as a whole. In particular investors are keen to know a director’s relevant experience and how that is utilised by the board; and
- a failure to articulate the risks associated with the business – this failure was characterised by the use of boiler plate disclosure in annual reports and an inability to link risks with key performance indicators, remuneration policies and corporate social responsibility activities. In this area the Report noted no improvement on the disclosure of risk and risk management from the year before which is disappointing.
‘Could try harder’
The Report goes on to identify that investors expect to see more meaningful disclosures and that the current shortfalls might be addressed by companies adopting a clear and honest approach to disclosures avoiding standard wording and boilerplate.
Clearly there is still a disconnect between investors’ expectations and companies’ performance. However despite this generally downbeat summary of compliance it is clear that the shortfalls may be readily addressed and a fix is at hand. Whether there is an appetite for the transparent disclosure regime requested only time will tell.