Cutting the clutter – governance reporting
Since our first blog on Cutting the Clutter, the report produced by the Financial Reporting Council (FRC) and Accounting Standards Board (ASB), to help companies de-stuff their annual reports, we’ve returned to look at one of their de-cluttering aids: Disclosure aid 1 on governance.
Like each of the three aids provided, the aid on governance offers up a set of components that would constitute a decent report on the subject. Each component is annotated so preparers of reports understand expectations and many of the steps seem very simple and straightforward to adopt. Yet there is a lot more contained in the recommendations than a first reading implies.
The underlying premise of the governance aid is that companies have got the wrong end of the stick when it comes to the UK Corporate Governance Code. There are only 18 out of 52 provisions in the Code that require disclosure. The remainder need only be addressed in a company’s annual report – explained – if the company doesn’t comply.
But fearful companies have tended to produce explanations in response to all 52 provisions within the Code, using the content of policy to populate their reports, when they needn’t have gone to such lengths at all.
Readers of annual reports found the policy stuff quite interesting in year one after the Code was introduced, as it showed some of the mechanics of how big companies work. But when policy content became a template for governance reports year-on-year governance sections became the ones to skip.
But it shouldn’t be thus. If companies begin to follow one of the most straightforward recommendations the FRC and ASB put forward for governance reporting – focus on activities, not policies – then these sections could become the ‘turn to first’ section of an annual report.
Particularly if they follow the personal approach to governance reporting this aid puts forward. The suggestion is governance reports contain personal letters from both the chairman of the board and chairman of the non-executive directors committees. What a brilliantly simple way to get a report that focuses on activities not policies.
Because by asking the chairmen to talk you’re effectively getting them to respond to the questions: What did you do in your job over the last year; what were the challenges; how did you overcome them; what processes changed and what difference to the company can we expect any changes to make? Tasty stuff!
An oft repeated recommendation in the governance aid is that readers be directed to further detail elsewhere (to other websites or appendices), which is an essential step to ensuring the report is full of just the essential stuff. This tactic will make it much more difficult for companies to hide inactivity amongst wedges of content that readers don’t have the inclination to wade through. It will force them to be up front with non-compliance issues, process for appointments, board evaluation and significant issues.
We like the approach Marks & Spencer have taken in the governance overview of their 2010 annual report ››
They ask the question, what has the board done during the year? And then with a simple wheel device entitled ‘Doing the right thing’, they straightforwardly answer the question, talking about the six things that matter most in the realms of governance at Marks & Spencer: Checks and balances; trusted brand; clear plan; strong leadership; motivated employees; delighted customers. What a treat compared to the 30 page governance report stuffed with policy not activities we found in another FTSE 100’s 2010 annual report.
Let’s hope by the next batch of annual reports more companies have taken into account the ideas and recommendations provided by the FSA and ASB. When the governance of companies is so under question, companies should take the opportunity to talk intelligently about what the leaders and non-executive directors within their business really do.