The importance of corporate governance
Baroness Neville-Rolfe talks to the Company Secretary Forum about corporate governance and the important role of company secretaries.
I would like to start by thanking Steve Williams for inviting me. Being one of you I know you do an invaluable job in keeping companies on the straight and narrow.
I have quite a lot of experience of being a member of a company board. I was first company secretary at Tesco and later a board member. I still can’t understand why the 2 are incompatible. I have been a non-exec at ITV, initially a turnaround challenge, and at PWC, a classic advisory board, and on the Supervisory Board of Metro, the German retailer. I have been chairman of a Scottish SME, Dobbies, and director of a large private food company. I was also a non-exec on the Foreign Office Board and the President of Eurocommerce, the European retailers.
These wide ranging experiences taught me 4 things.
1) The importance of succession planning. You need to work at it all the time as there are a number of key posts in any board. I remember when I had to leave one of my key posts early when I was made a minister, how lucky it was that we had discussed possible successors shortly beforehand. If you have a family company you need to decide which family members might one day succeed and groom them. The drive and determination of the first generation is not passed on to all in later generations, although it can be - look at Lord John Sainsbury and what he did in the 70s and 80s; and British Monarchs seem to cope most of the time!
2) The need for good process. This requires timely minutes that mean something if you have missed the meeting - and that goes for subsidiaries too, often a cause of corporate problems especially if independently run. Focused and crisp papers with clear preparation and the decisions that need to be made clearly signposted.
3) The need for some luck. This can take many forms. Talented management. Being in the right industry at the right time - Sunlight soap used vegetable oil and nice packaging to provide something needed by more and more consumers; supermarkets in the 90s were on a roll as busy women needed a one stop shop. Likewise it is helpful not to be in a very challenged industry - turnpikes when the railways arrived or HMV with songs being streamed.
4) The need for breadth of vision and due diligence. There is a natural tendency to focus on what one is good at, what one knows to be the issues and areas of success. A good board and indeed a good team in any area needs to have breadth and diversity and a respect for other opinions and concerns. As they say ‘don’t shoot the messenger’. A good experienced company secretary can play a vital role here. Having said all that let me turn now to your governance agenda today.
Direction of work
The government’s focus is concentrated on consolidating the current framework rather than adding new regulations.
I recognise that there are still some regulations in the pipeline, in particular those related to improving transparency. And make no mistake the anti-corruption agenda is hugely important to this government and extends well beyond the classic corporation into sports bodies and places where criminals launder money.
So legislation in the pipeline from our first term will include the register of persons of significant control. The aim of this register is to prevent companies being misused as vehicles for illegal activity.
On audit, we have issued a technical consultation on a range of significant measures of EU reform of statutory audit.
The company secretary’s role in preparing the company’s report and accounts is vitally important and I recognise the challenge facing you and the audit committees of your companies in the current changing context.
If you are based at listed company, a bank, building society or insurer, I would encourage you to view the EU reforms on auditor rotation and retendering as an opportunity for audit committees to sharpen up their role. They will introduce welcome competition and ensure that the accounting and audit assumptions are periodically reviewed with fresh eyes providing a useful discipline on management, the board and the audit committee itself.
Our intention in the implementation is to retain as much existing flexibility as possible to benefit the UK business environment.
This work will also provide clarity on the role of the FRC; for example, by allocating it audit regulatory functions that it will be obliged to delegate to existing professional bodies where possible.
I hope and believe that the FRC are also considering the value of less as well as the value of more. They will soon complete the revision of the corporate governance code, which we believe has influenced development in international contexts.
I welcome the FRC decision to avoid making any further changes until at least 2019. They will be focusing their efforts on ensuring the code is functioning as flexibly as possible.
Negotiations in Europe on the Shareholders Rights Directive, already drafted with the UK framework in mind, have so far ensured further alignment to the UK model. I refer to areas such as shareholders’ identification, executive pay and related party transaction, as well as to a clearer ‘comply or explain’ approach, with regards to the transparency requirements for institutional investors and asset managers. Discussions have started, however progress is slow and it is unlikely there will be any agreements before the spring.
Deregulation
The new government sees deregulation as a key priority – we have set a target of reducing burdens on business by £10 billion in the current Parliament and extending the programme to burdens imposed by regulators in the Enterprise Bill which I am taking through the House of Lords at present.
We are looking at the scope for targeted deregulation, for instance where advances in technology can reduce burdens.
For example, we plan to consult in the near future about options to ‘dematerialise’ paper share certificates into electronic format.
While the EU agreement is that this reform should be implemented by 2025, there are good arguments for bringing this date forward in the UK.
We will also shortly be publishing our consultation on the EU Non-financial Reporting Directive.
Challenges and opportunities
I want to continue on the theme of narrative reporting. Over the years, there has been a steady rise in the information in the annual report, requiring disclosure on many aspects of company business. This steady stream has led to more pages but in my view less clarity for shareholders.
This is not right.
We should engage shareholders in running their companies. The annual report is a key channel for your messages to achieve this. Shareholders, and indeed the directors signing off the pages, should be given a clear and concise picture of the business.
Showing how your company has met and solved its challenges, managed its principal risks and is seeking opportunities to promote the long-term future of the company helps shareholders to assess performance and provide effective challenge. My recommendation is to resist the temptation to prepare a deluge of text, especially with advisers often paid by volume and time spent.
Overall, I want to encourage you to be braver in your reporting, to use the flexibilities in the framework to say nothing where you have nothing to say and get the board to focus on the important messages for your shareholders.
We will be doing our part as well.
For example, the consultation on the EU Non-financial Reporting Directive will be asking for views on what information could be moved online as part of the work on electronic reporting.
We will also be looking for suggestions of reporting requirements that have gone past their sell-by-date and can be removed. Please have a think about your bête noires and let us know.
The opportunity here is to create an annual report that focuses the mind on the important messages but provides detail to those that need it. To cite Confucius “The superior person is modest in their speech, but exceeds in their actions”.
But reporting is not the answer to all problems. In particular reporting of risk cannot make it go away. To my mind, multiple risk is particularly important. If one of the risks on your risk register strikes you may be able to handle it well. But when things get tough 4 or 5 risks may reinforce each other as we saw in the financial crisis. So think about that too.
The Chancellor, in his speech at GCHQ last week, announced that government provision for cyber security will rise from £860 million to nearly £2 billion. Cybercrime is not something that happens to other people and companies need to protect their own networks, and harden themselves against cyber-attack. Company secretaries will play an important role in managing this risk. The recent cyber-attacks on companies shine a light on this incredibly important threat.
The role of investors
The core purpose of reporting is to give relevant information to shareholders to promote understanding of the company. It is clear that the operational responsibility for corporate governance and culture, the subject of a good recent session led by the Audit Quality Forum, rests with the board. But investors have an important role to play in the companies in which they invest.
We are continuing an approach of working to support voluntary initiatives rather than imposing rules and regulations.
In particular, we welcome the commitment from leading UK investment firms to develop an action plan to encourage long-term investment in and by UK businesses.
We hope that this work will help to reduce the focus on short-term results and increase the focus on issues of strategy and long-term success.
Business in society
I want to turn finally to the enormous contributions that businesses make to society. They employ and train tens of millions of people. They pay a large proportion of the taxes we use to fund all public expenditure. They provide goods and services to meet society’s needs - with innovation and competition accelerating that process. They create economic value for savers and investors.
Businesses also go beyond these important contributions. Their work with charities, in mutually beneficial relationships, sometimes achieve amazing results
This business initiative exemplifies the wider contribution that a business can make to society. As Bob Hope piquantly observed, “If you haven’t got any charity in your heart, you have the worst kind of heart trouble”.
Thank you for listening.