Part of the IoD’s royal charter is to promote good corporate governance. Following the release of a new report on the subject, our experts explain why companies of all sizes should be engaging in the debate around best practice
The IoD strongly believes in the promotion of good corporate governance in business (as well as being required by its royal charter to do so). But how can companies ensure best practice and why is it so important?
Last month the IoD launched a new report in association with Cass Business School to try to define good governance and the way it’s measured, and to encourage public debate around the subject.
“Corporate governance is fast-changing and organic, and this is about stimulating a debate,” explains Oliver Parry, the IoD’s senior corporate governance adviser. “This report began with us working towards a good governance index of listed companies and evolved into a focus point for debate on the issue.”
Companies of all sizes, says Parry, including small businesses, should aspire to good corporate governance: “Smaller firms tend to look towards the top – to the large corporates that have enjoyed huge success. Multinationals were all small businesses at one stage and it’s about improving corporate governance from the bottom up,” he says.
“When you look at the companies that struggled in the recession it’s clear that corporate governance had a part to play. I think it is a very important factor in how businesses are run and therefore perform. If you have a strong board, even if you are a small company, you can attract better investment – effective corporate governance is crucial to that.”
The problem that the report uncovered, explains Parry, is the perceptions of business versus the reality of best practice. “Our perceptions of what we deem good governance are affected as much by regulatory standards as they are by the media and how they view corporate behaviour. Some companies have been vilified in the press but on close inspection of their best-practice procedures they score well when it comes to corporate governance.”
Defining and measuring corporate governance
“Unlike good art, which is hard to define but easy to recognise, good governance is hard to define and hard to recognise,” says IoD board member Ken Olisa, who sat on the advisory board for the report. “Governance is all about behaviours – and behaviours, whether individual or collective, are hard to reduce to a coherent framework.”
So how do you measure corporate governance? The report includes the results of a survey of how business leaders regard the governance of major UK companies and identifies 50 factors that provide an indication of the governance risk at individual firms.
“The historical obsession with compliance with a tiny number of factors entirely ignores the nuance of corporate governance, much as a celebrity fad diet rides roughshod over the science of human nutrition,” says Olisa.
Roger Barker, the IoD’s director of corporate governance, says that although the UK listed market has one of the best development frameworks in the world, the new government should seize on this success and attach greater importance to the training and development of directors – of companies of all sizes – especially non-executives.
“It’s about working with shareholders to ensure they understand their roles and responsibilities, and it’s training providers such as the IoD, which has a long history of promoting corporate governance, that can help,” he says.
What advice would the IoD give business owners who want to ensure good corporate governance? “We would encourage best practice among UK SMEs while eschewing the imposition of greater regulatory and compliance burdens on non-listed companies,” says Barker.
“Training is an excellent way to keep abreast of legislative changes and remain up to date with corporate governance. We are also encouraging the government to consider the principle of incentivising, not legislating, for a longer-term approach to executive pay and shareholder behaviour, as well as attaching greater importance to the issue of director training and the board evaluation service,” he adds.
The IoD, says Parry, is keen for the directors of as many businesses as possible to engage in the debate: “In commencing this debate we at the IoD remain deeply conscious that we must seek to bring the outside in – that is, engage with not only our members but wider stakeholders.”
How can the IoD help you?
The IoD offers a range of training programmes from individual qualifications to bespoke board development courses. It also runs one of the few dedicated professional director development programmes in the UK – the prestigious Chartered Director qualification. The courses are held throughout the year around the UK.
“It is crucial that directors from all types of industry keep up to date on corporate governance issues, and the easiest way to do that is through training,” advises Barker. “The demands on leaders these days are extremely high and with the business landscape fast-evolving, it’s one way to keep ahead of the competition.”
Where can European directors learn more?
The European Confederation of Directors’ Associations (ecoDa), in association with the IoD, is running the next of its European programmes for directors on 19 to 20 October in Brussels. It offers the chance to learn about the nature of corporate governance and the role of Europe and the board.