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Beyond compliance

23 August 2016 by Karl George

Reporting: Beyond compliance - read more

An outcome-based approach to corporate reporting

Companies are still failing to provide a complete picture of their prospects to the detriment of existing and potential investors.

The possibility of incongruent reporting deterring investors should prompt organisations to think about the last time they had a complete and comprehensive review of their annual reporting systems, specifically with reference to effective governance. It is worth considering whether it is possible to adopt an approach, similar to the one for zero-based budgeting, where every element of the report is thoroughly re-evaluated.

When it is that time of year to produce the annual report, the accounts department circulates the accounts and statutory notes among the executive team for comment. The narrative includes words underlined from last year’s reports. The team is asked to include this year’s figures in the spaces and the report is sent to the board so that it can undertake checks and add the chairman’s statement.

This is similar to the incremental budgeting process of looking at last year’s budget, as the baseline has already been approved, and adding a percentage rather than starting from first principles or a blank piece of paper. The zero-based budgeting approach involves a fresh budget every year, without reference to the past.

Integrated reporting

The ability to read the annual reports of an organisation and understand clearly how it is fulfilling its objectives, how well it is governed and be able to benchmark this against other companies, would be pragmatic.

Clear evidence of robust governance and how this is applied within the organisation would also give more assurance. The introduction of the International Integrated Reporting Framework was instigated to promote the adoption of integrated reporting across the world. Released after consultation, the framework underwent rigorous testing by businesses across the world. The purpose of the framework is to establish guiding principles and content elements that govern the overall content of an integrated report, and to explain the fundamental concepts that underpin them.

Corporate reporting is a complex and sometimes daunting task as it is used to satisfy the needs of a variety of stakeholders, whether to fulfil statutory disclosures, the needs of investors and funders or the general public. Reports need to be comprehensive but not too lengthy. They should be simple to understand, but sufficiently detailed to provide meaningful analysis. Some reports have been found to exceed 500 pages.

Organisations in the private, public and voluntary sector are expected to report not just on profit or surplus but also detail their impact by evidencing outcomes and engagement with those who influence, or who are influenced by, the activities of the organisation across the wider economy, society and the environment.

The annual requirement to produce a report (including the non-financial information or ‘narrative reporting’) provides the framework and audience for this communication. By adopting an integrated approach, organisations can provide concise communication of their strategy, performance and governance.

The ‘comply or explain’ section of the UK Corporate Governance Code states: ‘The Listing Rules require companies to apply the Main Principles and report to shareholders on how they have done so.’ As a starting point, best practice is for all organisations to include details of how they have applied the main principles of the code they have adopted in their reports.

Corporate governance reporting, whether in the chairman’s report, as part of the statutory disclosures or other appropriate parts of the narrative, should explain how the composition and organisation of the entity’s governance structures support the achievement of its objectives. It presents an opportunity to demonstrate that the organisation is well run and can provide readers with more than descriptions of processes and procedures.

Despite some of the challenges, there are some improvements that have been made and corporate governance reporting is on the up.

Typical disclosure reporting

This type of reporting is normally set out to fulfil statutory requirements. Even where reporting is comprehensive, it does not integrate general reporting to provide an overall picture
of governance.

Typical disclosure reporting usually only includes the basic information necessary to show that governance has been considered, rather than it being fully integrated and expanded upon. For example, it will explicitly state compliance with relevant governance codes, give a full description of the appraisal process and how the board operates, and include details of board evaluation.

Alongside this, it is commonplace to include a biographical list of board members, details of induction and training processes and a list of committees, the number of meetings that have taken place and a high-level statement of matters reserved for the board. Although informative, this is not necessarily reflective of the depth of the governance work undertaken by the organisation.

Enhanced reporting

How can typical disclosure reporting be enhanced? The multi-stakeholder group Report Leadership propose five areas to consider when reporting on governance in their report ‘Corporate Governance – Simple, practical proposals for better reporting of corporate governance’.
Standard governance reporting can be improved by transitioning the focus in reporting from compliance to outcomes of the governance system. The below recommendations should
be followed:

Tone from the top – The chairman’s statement should include a summary of their reflections on strategy, risk and board evaluation. This presents an opportunity to demonstrate the importance and interrelationship of governance and leadership.

How the board works as a team – Emphasis should be placed on the diversity of the board and the unique skills and experience that each board member brings rather than just presenting a list of board members, which lacks purpose. An important dynamic is how the executive and non-executive work together and a description of this is beneficial.

Key actions of the board and committees – Reporting on the issues that the board and committees focus their attention on is more useful than just including a list of the terms of reference of the committees.

Board effectiveness – Make a note of the key findings identified by the evaluation process and any actions, instead of merely offering a description of the process.

Communication and engagement with stakeholders – Provide an integrated report
of the corporate integrity, social value and
value for money.

Corporate governance is an important facet of the functioning of every company. It is crucial that reporting reflects this in a way that is user friendly, informative and adds value to the appreciation and understanding of how effective the organisation is.

Reporting should not be just about compliance. Good reporting can give users a clear picture of the competency of the board, drawing out the balance of skills and expertise which serve the organisation. It also documents the work of the committees and the framework that they operate under. Reports should highlight not only what the board evaluation processes are but what they have uncovered and how the organisation is acting on the findings, as well as any future plans for improvement.

Checklist for enhanced integrated reporting

An enhanced integrated report (EIR) will provide users with a better understanding of the organisation and how it is led. This detail is interwoven into the fabric of the report, which negates the need for a separate governance report. An EIR may include:

  • Chairman’s statement to set the tone
  • Evaluation criteria linked to strategy and performance
  • Achievement of KPIs
  • Frequency of risk register reviews and key mitigations agreed
  • Stakeholder feedback and investor relations communication
  • Attendance of board members
  • Relevant skills and experience of the board
  • Evidence that the evaluation process is robust and subsequent findings
  • Outcomes of evaluations and action plans
  • Evidence of progress on actions included in evaluations
  • Significant changes to governance processes during the year
  • Description of the work carried out by the audit, remuneration and nomination committees throughout the year
  • Demonstration of how the main principles of your chosen governance code are applied.

Karl George MBE is Managing Director of the Governance Forum

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