Drinks giant Diageo, the owner of Guinness, Smirnoff and Johnnie Walker, has emerged as the highest ranked UK-listed company for the quality of its corporate governance in the Institute of Directors’ annual report on the health of large company boards, which is supported by the Chartered Quality Institute. Now in its third year, the 2017 Good Governance Report was compiled for the IoD by Cass Business School, and examines a range of 47 factors relating to how companies are run, including board diversity, directors’ pay, how long the business has been with an auditor and whether they have a whistleblowing policy.
The number of measures examined has been expanded this year to give an even more comprehensive view of how well the company performs for its shareholders, employees and customers. Uniquely among indices of this type, the IoD’s report combines publicly-available data with over 2,000 rankings of the companies given by individuals with knowledge of what good governance looks like, including members of the IoD and the CQI, company secretaries and accountants. The final ranking is weighted based on the perceptions of the different measures, with audit and risk being seen by governance experts as the most important.
The full table is available on pages 12-13 of the report.
The relative size of the company seems to have no effect on the position of the 100 companies studied, and the top-ranked business come from a range of different sectors, with the insurer Aviva and the engineering firm GKN coming in second and third place respectively. Overall, energy companies outperformed compared to the average score, while IT companies underperformed. The IoD’s intention in producing the report is to encourage companies to consider a wide range of factors when doing a health check of how well their board and executive are functioning.
The report will be launched at an event featuring panel discussions on good governance with Tracy Gordon, Director of Deloitte UK Centre for Corporate Governance, Daniel Godfrey, Chief Executive of the People’s Trust, Jennifer Sundberg, Co-Chief Executive of Board Intelligence and Helen Stephenson, Chief Executive of the Charity Commission.
Ken Olisa, Deputy Chairman of the IoD, and Chairman of the Good Governance Report advisory panel, said:
“Corporate governance has rarely been out of the headlines since we first set about creating a way to rank the UK’s top companies’ performance in 2015, and with each scandal pressure grows for the imposition of tougher regulation along with calls to report statistics of dubious merit. This is the wrong approach. Corporate governance is about much more than compliance – it’s about achieving competitive advantage.
“Business is a form of sport. As with any sport, championship requires a comprehensive understanding of the human, the equipment, the arena and of course the rules. An obsession with the statistics of only one of those elements won’t win medals. And equally, conformity in which all of the participants are required to act in identical ways is antithetical to competition.
“In the same way that a racing newspaper will analyse runners’ form by reference to a set of performance related criteria, the good governance initiative is intended to assist Boards to understand the implications of the many indicative factors which, in aggregate, determine the quality of corporate governance.
“Our hope is that British boards will embrace the underlying subtleties of the third Good Governance Index and so include as a regular agenda item, discussion of how well their company’s high-level system of direction and control is contributing to the business’ success.”
Estelle Clark, Director of Policy at the Chartered Quality Institute, said:
“This is an excellent start to the good governance debate, and we must now extend the discussion into the FTSE 250 and beyond, into private companies and even public sector organisations. The report clearly shows that there is no correlation between company size and effective corporate governance, which demonstrates that governance is not a matter of resource but of culture and will.”
Mrs Clark believes that the report also challenges the assumption that corporate governance is solely a financial issue. “Corporate governance is much more than the narrow issue of executive pay and the misuse of zero hours contracts. Companies with potential governance issues will not find the remedy solely in the audit and remuneration committee.”
She continued: “Society’s view of what constitutes good governance is changing, moving away from the narrow definition of financial performance towards a broader definition that takes into account an organisation’s impact on all its stakeholders. The 2017 Good Governance Report has included measures of whether a company is a signatory of the UN Global Compact and the Prompt Payment Code, for example.”
Mrs Clark believes the challenge facing many organisations lies in operational governance below board level. “A number of the key indicators in the report relate to the ability of organisations to take the aims and ambitions of the board down into the body of the organisation. High profile operational governance failures, such as Bell Pottinger and Uber have been immensely damaging.”
Mrs Clark concluded: “We want the 2017 Good Governance Report to be the spark that encourages companies and organisations to embrace and debate governance at all levels.”
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