Simon Lowe

What is CR and what benefits could reliable disclosures provide for investors?

CR identifies the relationship a company has with its stakeholders and the responsibilities it has towards society. Ignoring these responsibilities could be costly to the company. CR is essentially all about reputational risk management. Risks include public disapproval and suspicion, criticism of the company, damage to customer loyalty, loss of brand equity and a tarnished reputation. Internal risks also include embarrassment, poor morale and reduced commitment from employees. Alternatively, pioneering CR initiatives could provide a company with a strong competitive edge.

Section A.1 of the Combined Code states that the board should set the values and standards of the company, and ensure that the company meets its obligations to shareholders and other stakeholders. The 2006 Companies Act also addresses CR issues by linking them to the duties of directors. Directors should take an enlightened approach to value-creation by taking into account, where relevant, the interests of other stakeholders, the company’s social impacts and its reputation for integrity. Another source of information is provided by the FTSE4Good Index Series, which has been designed to measure the performance of companies that meet globally recognised CR standards, and to facilitate investment in those companies.25 FTSE4Good has issued a report called ‘Rewarding Virtue’.26 The report recommends that ‘boards must deal with corporate responsibility in their routine agenda items: approving strategy, reviewing risks, managing executive incentives, overseeing internal control, and setting the tone of the business’. The report also includes recommendations for directors and best-practice guidelines for CR reporting.

Further support for CR disclosures is given by Sir Derek Higgs in his report, describing CR disclosure as ‘a useful addition to thinking about corporate governance’.

CR principles or guidance should provide specific comparable metrics for the preparation and comparison of CR disclosures. In the medium term, the most likely development is the emergence of industry-specific metrics. In the longer term, without regulation across industries and countries, there is unlikely to be any directly comparable information, resulting in limited value disclosures.

Is the UK model of corporate governance working?

All stakeholders have a part to play in developing, implementing and monitoring corporate governance practice. Without the buy-in from any one party and continuous pressure from all parties, there is a chance that the principles-based corporate governance framework will not be successful.

The UK approach to corporate governance incurs lower levels of cost compared to those imposed by SOX requirements, in terms both of actual cost as

25www.ftse4good.com/Indices/FTSE4Good Index Series/index.jsp.

26www.ftse4good.com/Indices/FTSE4Good Index Series/ Downloads/rewardingvirtue.pdf.

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Is the UK model working?

well as of management time and administrative burdens. The UK framework gives the opportunity to provide clear and transparent disclosures, moves away from one single overall claim of compliance and covers a wide proportion of the COSO model, rather than focusing on financial risks only.

The current principles-based, comply-or-explain approach to UK corporate governance is the correct model. It fits well within UK business culture and provides the robust governance framework required by the capital markets to help regulate companies at board level. However, UK companies must beware of complacency, for example in the form of boilerplate disclosures, as it contradicts the spirit of the Code. The recent reviews of the Code have had a positive outcome. As long as the thought leaders and think tanks alike support the Code and the effect it has had on UK companies, the UK corporate governance framework will continue down this same line. Of course, the Code and associated guidance will evolve as governance techniques become more refined and disclosures become ever more sophisticated. This is borne out by the various reviews discussed in this chapter which reflect a year-on-year improvement of governance disclosures among the leading companies. For now the UK model is working, and will continue to do so, as all stakeholders apply governance principles within the spirit of the Code. Is it working? Yes. Is it perfect? No. Can shareholders do more? Yes. Can regulators do much more? No. Can boards do much more? Emphatically, yes.

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