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Finding humour in governance
17/11/2016
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I read something about governance today that made me laugh out loud. It’s all very sad, really.

Practical Law have just released their “WHAT’S MARKET PRACTICE? Insights and trends from the 2016 reporting season”. It is a useful synopsis and gives indications of what is going on, based on analysis by the mighty Black Sun and Equiniti, but…

One of the key points drawn is that “Overall compliance with the UK Corporate Governance Code (“the Code”) has increased during the 2016 reporting season”.

Yay, great stuff; governance rules! The FRC mentioned a similar stat a couple of weeks ago, so perhaps things are looking up for Mrs May.

Or maybe not. In the report it says “Our analysis illustrates that the 2016 reporting season has seen a decrease in the number of companies that have disclosed non-compliance with at least one provision of the Code” and “Our findings also show that there has been a decrease in the number of Code provisions with which companies have disclosed non-compliance”.

The key point and the two comments are not the same things at all. Companies are ‘fessing up to less non-compliance, and the evidence suggests to non-compliance with fewer Provisions, too. This does not mean that compliance has increased; it does mean that non-compliance is not being disclosed.

As usual, there is intense focus on the Code, but much less on the other parts of the regulatory framework. Our FTSE100 research, which involves reading and understanding the content of the reports, as well as gathering stats, shows the confessional trend, too, but it also shows that over 50% of the FTSE100 issued a statement of full compliance with the Code but were not compliant with one or more of the Provisions of the Code, never mind all those who tripped up over the Listing Rules, the Disclosure and Transparency Rules and even the Companies Act 2006 itself.

I will repeat that. A majority of the FTSE100 are non-compliant with one or more of the statutory or regulatory governance reporting requirements, even ones which are not optional. The work we have done on the FTSE250 suggests an even bleaker picture there.

Hence the laugh. Read enough governance statements and remuneration reports and that is what happens to one’s sense of humour.

What might be going on?

We have been told that proxy agencies, especially PIRC, will mark a company down for non-compliance, even if it is properly disclosed and explained, so some companies are becoming reluctant to highlight any sort of non-compliance at all.

Other companies just ignore non-compliance as they deem a specific requirement to be “immaterial” or “just technical”. It would be fascinating to understand how they arrive at that judgement.

And others, and I paraphrase here, said it did not matter what the law required, they were just not going to comply. One response that stood out for its clarity was, “Two fingers to that”.

Does it matter? Well, it keeps us busy, so we might not be the ones to give an answer, so I will invoke the opinions of higher powers.

An alphabet soup of the FRC, the Chartered Institute of Management Accountants (CIMA), the City Values Forum, the Chartered Institute of Personnel and Development (CIPD), the Institute of Business Ethics (IBE) and the Chartered Institute of Internal Auditors (IIA) delivered their report on Corporate Culture and the Role of Boards earlier this year.

In it, they cite a report by (more soup, sorry) the Institute of Chartered Secretaries and Administrators (ICSA), the International Corporate Governance Network (ICGN) and IBE, published in February 2016. That report identified three main drivers of bad behaviour, the third of which was tolerance by companies of small breaches of the rules or a tendency to push at the limits of what was permitted by the rules or regulations, which allowed misdemeanour to grow incrementally. This tolerance is one of 13 “red flags” Boards are told to keep an eye out for and take a closer look if one is spotted.

In an idle moment, one might wonder what this says about the culture of Boards and Audit Committees responsible for the breaches of rules in their Annual Reports.

Whatever; a large chunk of the FTSE100 should have red flags (hoho) hanging over their reports, calling their governance culture into question and requiring a closer look.

But by whom?

Robert Lea asked a similar question in The Times on Monday (14/11) about the Companies Act in general and Section 172 in particular. The FRC, FCA, BEIS and Treasury have been tolerating these small breaches in reporting rules for years, so maybe they all have red flags hanging over them, too?