With declining public confidence in business, the Government and the regulator turning up the heat on corporate governance, and a ‘comply or explain’ model that places reporting at the heart of good governance, the question as to whether 'better disclosure in annual reporting means better governance' is on everyone's minds.
International law firm Pinsent Masons recently gathered industry participants to continue the conversation, alongside Grant Thornton LLP and the Financial Reporting Council (FRC), to delve deeper into whether better disclosure actually leads to better governance.
Martin Webster, partner and governance specialist at Pinsent Masons said:
"Better disclosure can lead to better governance, but it's a better corporate culture that needs to be the key goal. What we certainly don't need is more disclosure (HSBC's Annual Report last year weighed in at 502 pages). Rather, it's the lead given by the Chair and the Board which has to encourage a more open and honest appproach to good news, as well as the less good, and to a company's long-term strategy.
"Ticking boxes for the sake of it will never be the answer, but one benefit disclosure can bring is to nudge companies towards better practice. To take one example, the increase in the number of women on the boards of major companies in the last few years is unlikely to have been achieved without the requirement for companies to disclose what they were doing to improve gender diversity. With the Parker Review recently published, the same is likely to happen with ethnic diversity."
Culture and diversity, including the example of women on boards, was an issue that was addressed with disclosures. Research from Grant Thornton's 16th annual UK Corporate Governance Review 2016 found that 76% FTSE 350 boards talk about diversity in areas other than gender in their annual reports, up from 55% the year before. It argues that this represents a shift in focus on boards' policies that was started with gender. So gender diversity has increased the number of women as well as encouraging boards to talk about issues other than gender and broaden the conversation about diversity. Better disclosure doesn’t always lead to good governance, but it can nudge it in the right direction.
Simon Lowe, partner and chair of the Governance Institute at Grant Thornton UK LLP commented:
“More companies than ever recognise the commercial advantage of effective governance practices and disclosures; yet there remains substantial room for improvement. Good quality disclosure is key to changing governance practices, and a large proportion of companies still provide only the bare minimum, complying but not fully embracing the principles of the Code."
According to the Financial Reporting Council's Developments in Corporate Governance and Stewardship 2016, UK corporate governance is strong but still needs to evolve. Some changes to the UK Corporate Governance Code will be made but even without these the landscape of corporate governance is changing and there is more Companies can do to improve trust in business and promote a strong economy.