For many businesses around the globe the role of strong governance is associated with compliance. It’s seen as a box ticking exercise to be endured ahead of the annual report; costing time and resource but delivering little value. It’s a common point of view. It’s also wrong.
Over the past 17 years, Grant Thornton UK has analysed the governance progress made by FTSE 350 companies, using a structured methodology to assess the applied governance practices disclosed in their annual reports.
Consistently they have found that the strongest governed companies, that create dynamic decision-making environments, deliver double the shareholder value over a ten-year period than that of the weakest governed companies.
If you're still approaching governance as purely a compliance exercise it could be costing you a lot more than you think.
While businesses have been taking governance requirements increasingly seriously over the past decade, with many countries now adopting some form of guidance and/or principles based on the UK Corporate Governance Code (the Code), often too many treat it as guidance imposed on them; a compliance exercise.
Many organisations feel this way, explains Sarah Bell, Partner, Governance and Board Advisory, Grant Thornton UK, “approaching the UK Corporate Governance Code with a tick box mentality designed to deliver the bare minimum necessary to comply with regulations as opposed to it acting as a blueprint which can drive sustainable results.”
The opposite is true. Our research has concluded that the regulator takes best practice examples from successful companies and codifies them into their own governance requirements. As such the Code is a dynamic instrument, reflecting and distilling best practice and affording everyone else the opportunity to learn from the best.
“Businesses in India are also starting to realise the benefit of implementing some of the governance code in spirit rather than as a compliance requirement,” says Bhanu Prakash Kalmath S J, Partner, Grant Thornton India LLP. “Boards are investing significant time in governance initiatives such as imbedding the right culture and institutionalising a strong Enterprise Risk Management framework.”
We believe it’s time for businesses to embrace strong governance practices; learning from the summaries of best practice available and bringing their own governance in line with market leaders.
“In New Zealand our regulators and laws are continuing to reflect the changing expectations and needs of society. Given that our legislative goal posts are moving, those charged with governance are having to change from a purely compliance mindset to one of actively building shareholder value through proactive decision making” say Mark Hucklesby, Partner and National Technical Director from Grant Thornton New Zealand.
But why focus on governance? It’s a fair question, particularly if your business views strong governance as a ‘nice to have’. The answer is sustainable financial results.
Greater awareness for Board and management in their oversight responsibilities in the areas of governance, risk and compliance has also been created in Australia following the release of Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission) and the Australian Prudential Regulation Authority’s Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia (APRA’s CBA Report) in early 2019 and 2018 respectively.
“Since the release of these two reports, there has been heightened focus on greater accountability, transparency, ethical conduct, fair dealing and regulatory oversight within Australian businesses states Madeleine Mattera, partner and national head of financial services, Grant Thornton Australia. “The financial services sector in Australia is a great case study in demonstrating how organisations with strong corporate governance and risk culture avoided the significant destruction of shareholder value that organisations that were found wanting experienced.”
Our research shows that the strongest governed companies create and retain value more effectively than those with weaker governance practices. This value is visible across the range of metrics, from cashflow to returns, profitability to share price.
Simon Lowe, Chair, Grant Thornton Governance Institute, Grant Thornton UK, highlights that “perhaps most importantly the research found that when a company significantly improves its corporate governance practices, it markedly transforms its ability to create value.”
“Strongly governed companies can also attract the best talent, including deserving directors, continues Bhanu. “Regulators in India have also made changes such as limiting the number of directorships to enhance the quality of board.”
Time for change
No one is claiming strong governance alone guarantees strong performance. It’s not the sole factor of success. However, our findings clearly link strong governance practices to the likelihood of better returns, improved performance and better operational and financial returns.
Sue Almond, Global head of assurance, Grant Thornton International Ltd agrees, “Strong governance is key for business growth, to manage risk and remain profitable, the tick box approach is simply no longer viable for any business looking to accelerate into the future.”
Where do you start? And what areas of corporate governance should your company focus investment on to drive the biggest returns?
Six areas of strong governance
The research analysis found that corporate governance leaders (those in the top quartile of the Grant Thornton UK Corporate Governance Index[i]) scored high in six key areas:
- Clarity and connectivity
Understand your business model. Know how your company makes money and articulate this clearly enough to draw a direct link between it and your strategic objectives, values, risks and rewards.
- Culture integration
Define and articulate your culture. Be clear about values and behaviours and identify the key metrics you will use to monitor success in embedding that culture into your decision-making framework.
- Board effectiveness
The composition of the board should reflect the company’s strategic priorities markets and risks. Create an environment which leverages diversity to build a broad skill set in your key decision makers.
- Succession planning
Identify the skills you will need to deliver future strategy and take time to develop future leaders at senior management level and below. Outline how succession planning interventions are improving diversity.
- Risk management
Anticipate and understand the principal risks to realising your strategy and purpose, provide detailed disclosure on them to your decision makers and plan the appropriate level of mitigation.
- Internal controls
Understand your controls framework and how it operates to manage all principal risks (not just financial). Develop a system to regularly monitor the effectiveness of your controls and maintain consistent controls across divisions.
Get smart about governance, the tick box approach is simply no longer viable for any business looking to accelerate growth, manage risk and remain profitable.
To discuss any of these findings please contact our team.