Corporate Governance. Making the Middle More Central.
You have probably heard your design agency refer to your Annual Report as having a front, middle and back. Research shows that this generic and siloed approach to investor communication makes annual reports disjointed and suggests that governance is an academic exercise, divorced from the running of the business.
In the wake of the financial crisis, the focus on corporate governance is more intense than ever. The new code from the UK’s Financial Reporting Council (FRC) has been followed by another in the US from the New York Stock Exchange (NYSE), and there are further developments to come.
While governance has continued to evolve, the way companies report it has not. The typical governance section in an annual report is driven by the need to disclose rather than the desire to communicate.
The new UK code, though, seems set to change this. One of the FRC’s principal conclusions is that companies should follow the code’s spirit as well as its letter. In our view, this applies as much to the way companies communicate governance as it does to their governance itself.
When writing their annual reports, most companies have a single question in mind about governance: what do we have to say? Following the code’s spirit requires companies to consider a much broader and more meaningful set of questions, such as:
– Why is this subject important to investors?
– What do they want to know about it?
– How can we most effectively explain it?
– What has changed since last year?
– How does it tie in with the rest of our report; strategy and business model?
This approach will lead to a very different, more integrated and more useful report, avoiding what the FRC calls ‘the fungus of boilerplate’ and the ‘dead communication’ it results in. It may also mean going beyond the UK’s disclosure requirements. The NYSE, for example, encourages companies to talk about management’s role in governance, a discussion which would undoubtedly be valuable for UK investors.
On its own, however, adopting the spirit will not be sufficient for successful communication. Companies will also need to focus on how they present their information. The following tips are just some of the ways you can get greater focus and attention on your messages:
– Put a human face on your governance reporting by including letters from the chairman and the chair of the remuneration committee. These are also ideal places to set out your key governance messages.
– Use summaries or ‘at a glance’ pages to make your governance section work for skim readers and to provide context for those who go on to read the detail.
– Think about the structure of your governance section and ensure it has a narrative with a logical flow, which is easy to follow and more likely to convince your readers.
What about specific areas for improvement?
The new code emphasises the role and effectiveness of the board. Companies need to communicate clearly in these areas, particularly if they wish to explain rather than comply with the recommendation for directors to be re-elected each year.
In addition, most companies fail to make an explicit connection between their strategy, performance and directors’ pay. The onus is therefore on companies to explain how their management are incentivised to achieve their strategic objectives. Indeed, the UK government may make this a requirement after its
This continually changing landscape should not deter companies from reassessing their governance reporting. Since disclosure requirements change when current practice fails to meet users’ needs, companies who really consider what investors want should find that they anticipate these changes, making compliance
In the meantime, following the spirit of the code will help align companies with the
FRC’s second conclusion – that investors and boards need to improve their interaction. By enhancing their reporting, companies will create better-informed investors who can engage in an effective and mutually beneficial way. As always with reporting, it will be the companies who put in the most effort who get the most out of it.
Finally, pursuing the spirit rather than the letter of the code will make a substantial difference to the success of online governance reporting. A communication-led approach, which brings key messages to the fore and focuses on the needs of investors will be far more effective online than the dense, text-heavy, compliance-led approach which currently dominates.
Better interaction design will also make it easier to integrate governance reporting into the rest of the annual report, through linking to relevant content so that investors can quickly gain the full picture. The result should be a transformation
of investors’ experience of governance reporting.