Apply and Explain, how to do it.
The Financial Reporting Council have just published the Review of Corporate Governance Reporting November 2020 and it got me thinking about the importance and usefulness to stakeholders, of effective reporting. Any form of external corporate reporting has a part to play in responding to the current unprecedented, unchartered and still uncertain environment that we are all currently operating in. Although in my opinion, this is where governance reporting has an even more critical role and a broad responsibility.
Let me explain why I believe that it is in times of crisis, uncertainty and challenge, that we need a barometer with which we can measure performance, sustainability and how the leadership are responding. You see, it is at these times that stakeholders need clear, concise and transparent communication, not only to understand the implications of both local and global considerations but to also make decisions about how these have an impact on their current strategic thinking. Good governance, as I have explained and explored in previous blogs, is more than compliance, and therefore it shouldn’t be a hindrance to performance. In fact, it is an enabler and has wide environmental, societal and economic benefits.
Governance is at the centre of an organisation’s strategic operating framework and evaluating its effectiveness remains an important goal. How we do this means that there has to be ‘buy-in’ from the organisations that complete reports for external consumption. They have to agree to “play the game”, a tick box approach does little to help them or their credibility, and without a commitment to properly consider the principles of any code will leave the process of accountability, looking rather suspect.
I digress slightly to make a point; I have often coached individuals looking for board appointments who can easily list an array of skills that they have been able to gather over successful executive and non-executive careers. However, I find myself asking them to be clear on application forms and at interview, to describe not that they have the skill, experience or insight, but for them to help me to understand it through an example, something they have achieved and the (actual or intended) impact it made. Similarly, when I review a report on how an organisation has applied their governance code principles, provisions or requirements, it is unhelpful to find a list of generic actions that anyone could write.
Apply and Explain – This approach to governance finds it origins in the King IV Report on Corporate Governance for South Africa, and assumes that organisation’s will already be in compliance with the principles and they should move beyond a tick box approach by them describing how their practices achieve compliance with the principles.
Comply or Explain – This approach rejects the view that “one size fits all” and was first introduced after the recommendations of the Cadbury Report of 1992. This is a regulatory approach that allows for the organisation to explain publicly why they do not comply with a provision of a Code.
If we have bought into this process and approach, and to ensure good governance, we must include apply and explain for the principles and comply or explain the provisions. If we can focus on carrying out the code compliance process robustly and comprehensively, perhaps we can collectively make a difference to prevent, detecting, mitigating failure and enhancing performance.
The following list may be helpful in demonstrating that a Code has been reviewed adequately, and ensuring that the principles and provisions apply, make sense to your organisation and ultimately, where followed, will make a difference.
• Ensure the governance principles and provisions are discussed and reviewed at the highest level of the leadership structure and integrated with all strategic discussions and not treated as an isolated company secretarial function.
• Adequate resources, appropriate planning timescales and the right people, including cross departmental senior leadership groups, are to be brought together to review the Code.
• When considering how the organisation is to apply the principles, it also takes time to seek out as much stakeholder feedback and engagement as possible and how to best communicate the findings.
• Provide evidence, examples and case studies of how the application of the principles have been carried out and what impact this has had so far and what is expected for the future including how this will be monitored.
• Pay attention to the cohesiveness of the reporting, governance reporting should integrate and sign post relevant reports so that the reader can appreciate the overall picture.
• I have commented on the golden thread that I expect to see in a well governed organisation of PVSC – Purpose, Value, Strategy and Culture. This golden thread should be easily demonstrated in the reporting framework.
• Where there is non-compliance there should be a clear explanation with the background, reason for non-compliance and reasons, mitigations and if compliance is on the agenda for the future, then timescales for this and risks should be outlined.
• Reporting should include key metrics, including non-financial key performance indicators and how they align with the strategic objectives and cover issues such as diversity and inclusion.
• Stakeholder engagement should include analysis of how they have been recognised, listened to and been engaged and ultimately how any feedback has impacted decision making, paying particular attention to employees.
