I suspect that many people have no idea what a big impact non-executive directors (NEDs) can have on an organisation.

If anything, the man on the Clapham omnibus probably thinks of non-execs – if he’s heard of them at all – as white men with grey hair who get together every so often for a quick meeting and a decent lunch, in exchange for a sizeable chunk of change.

Although Boards are struggling with many issues – and diversity is one of them – this is a very outdated view of a NED. A good NED can be an extremely valuable (if often unsung) resource for the Board and for the business as a whole, and the role of the NED has become increasingly significant in recent years.

NED responsibilities include contributing to developing the corporate strategy, ensuring that reporting is accurate, and checking that the risk management system for the company is robust and comprehensive. They also work on remuneration and succession planning for the executive team. They have a role in assuring compliance with governance codes, ethical standards and best practice, as well in protecting shareholders’ interests. And because (if independent) they have no financial stake in the business other than salary, they should be able to provide an objective view.

NEDs should be able to contribute their expertise in other companies and other industries, enabling the Board to see different perspectives. Because of their experience ‘from elsewhere’ they may be able to see risks and opportunities that the executive team has overlooked. But they need to understand this business well enough that their advice doesn’t have a negative impact…

And while the Board should function as a team, executives and non-executives together, the NEDs are also expected to monitor the behaviour of the executives, and to challenge them on their decisions.

All this is a difficult balancing act; the executive team probably hold their roles because they are highly competent, strong-minded and forceful characters, with a great deal of expertise in their areas. A good NED will be able to provide a counterpoint to the existing team, while not being drowned out by it.

Why mention this? Well, the NED awards are coming up again, with awards available in 5 different categories: FTSE 100; Not-for-Profit or Public service; Quoted; AIM companies; and unquoted companies. And there’s an overall winner too: last year this was Mary Francis, Senior Independent Director (SID) at Centrica, who was commended for her role as SID and as Chair of the company’s Corporate Responsibility committee.

There are just over 3 weeks left to nominate before the October 21 deadline; is there a NED you feel has excelled this year?

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 Corporate Eye

It is time for a new corporate governance editorial focus. Why?

Corporate governance has a long history, perhaps beginning as far back as the 4th century BC, when the Chinese philosopher Mencius argued that it is acceptable to overthrow corrupt or unjust rulers, through the establishment of joint stock companies (perhaps as early as the 13th century, but certainly by the 17th century) and stock exchanges to facilitate the sale of stock, to the US Securities Act of 1933 – the first to regulate the securities markets, particularly with respect to disclosure – and the development of corporate governance codes in the 1990s. In 2002, in the US, the Enron collapse and other corporate scandals led to the Sarbanes-Oxley Act; and in 2009, the UK Walker Report recommendations were published, closely followed in 2010-11 by revisions to the UK corporate governance code, and the development of a stewardship code for institutional investors.

Still, two and half millennia of governance experience, and many regulatory and legal interventions seemed to do little to prevent the catastrophic 2008 world economic collapse. The reaction is dramatic…

“We are in the middle of the biggest revolution in corporate governance since the 1930s…

Richard Cellini, senior VP of business and legal affairs at Integrity Interactive Corp.
“After the Storm”, The Conference Board Review March / April 2009

This broad sweeping commentary is supplemented by others who focus on more specific items:

• Risk Management

  “The crisis has also thrown up some massive failures in risk management. Even where companies had mandatory internal controls on reporting for the financial accounts, their executives did not fully grasp or clearly communicate the financial risks of many of the instruments they were betting on.”
  Source:  Corporate Governance-Lessons from the  Financial Crisis OECD

• Not Enough Regulation

  “With (Brooksley) Born (former head of a regulatory unit who, in the late 1990s, warned about the risks associated with  complex financial instruments) out of the way, the last two years of the Clinton administration were a heyday of deregulation. OTC derivatives were off  limits. Banks were freed to make riskier investments. Wall Street was largely left to regulate itself.”
  Source: The Warning, Public Broadcasting System

• Too Much Regulation

  “…, the U.S. government and quasi-governmental agencies have developed a near unfathomable maze of corporate performance reporting measures that have clearly helped, but are largely inadequate to safeguard corporations and improve the public trust. The end result is that investors, the public, and even management can’t evaluate the extent of their exposure regardless of the position outlined in much company information.”
  Source: Beyond Transparency: Information Overload and a Model for Intelligibility
  ROBERT L. LAUDAND DONALD H. SCHEPERS Business and Society Review 114:3 365–391

• Communications

  “It’s time for CEOs and boards to understand how powerful customer and employee social interactions truly are, and how they are accelerated and enabled by online communications and cloud technologies. For boards to succeed, nothing less than a shift from traditional closed governance to open and socially aware independent directorship is required.”
  Source: Talkin’ ’bouta Revolution. By: LIBERT, BARRY, POTTER, STEVEN, Institutional Investor, 00203580, Apr 2011, Vol. 45, Issue 3

This small sample of key issues in corporate governance is supplemented by many others such as executive compensation, lack of board oversight, ethics, internal controls and more. All point to a need to revisit corporate governance, so we will focus our posts on these topics and others around communicating corporate governance including–

• how to explain what corporate governance is
• discussing the difference between corporate governance and management
• best practices in corporate governance communications on websites
• how to explain relationships between board/senior management on the corporate website
• why leaders need to communicate and be visible
• ideas for explaining the corporate strategy and progress against that strategy.

Well there it is: our new corporate governance focus.

Let us know what you think. Comments Please: readers are encouraged to provide their thoughts on what they believe should be covered in future posts.

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 Corporate Eye

I invited Kenneth Kendrick, who has experience of whistle-blowing, for his views on how companies should communicate their openness to such reporting on their corporate websites. Kenneth is looking for work at the moment: he’s open to various types of work, but is looking for quality assurance or advocacy work. If you can help, you can contact him by email.

How to get employees to report unethical practices before your business suffers

Known as the ‘Whistleblower’ for Peanut Corp on Texas I have had extensive discussions with others in the same predicament. Reporting an ethical, or any, violation can destroy both your career and personal life, as it did mine.

Most people I have talked to—and I agree with them—say that having a company policy and procedure in place will make it more likely that your front line employees will keep you abreast of what is happening.

Most whistleblowers affirm that a third party company handling the complaints makes it easier for them to make a report, especially for a smaller business where employees would have a stronger fear of their reports coming back to haunt them. In a larger organization, where the call is likely to go to someone who has no idea of who an employee may be, this can still be effective.

Employees must also understand that they may be one of only a few people who know about a violation, and thus they will be suspected no matter what mode of reporting they use. Any good company policy will have a contact name to report retaliation at the top levels of the organization.

When it comes to your company’s website, this information should be easily accessible, with both an email format and phone number for reporting violations, and for reporting retaliation. Some people are more comfortable speaking, and some writing.

Giving each report a number or code, so that an employee can follow up is essential to making your workers feel that these reports are not being ignored.

Above all else, as we all too often hear, it is the company culture that will dictate open communication. If someone can speak freely about such concerns with immediate supervisors without fear, problems can be solved quickly, but having a hotline on your website still shows that the organization means what it says.

Policies and procedures should strongly emphasize your commitment to open communication without fear of retaliation. Any link on your site that shows how an employee can report a violation, should also have a link to the companies policy and procedure on these issues.

Thanks Kenneth!

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 Corporate Eye

Corporate governance affects all of us – yes, even those who don’t hold stock in any companies – because the way that businesses are run matters, as we’ve all learnt over the last few years.

Paul Nixon (CEO) recently interviewed Mark Hynes from Transparency Matters, to find out what he thought about how companies communicate their corporate governance and risk management – and how it could be improved. Mark is known to be expert in this area, and spends a lot of his time advising companies on how to improve their corporate governance; we were delighted that he could take some time to share his thinking with us.

Do listen: there are lots of interesting ideas to consider, from what, specifically, you could (and maybe should) consider including on your corporate website, through fully-integrated reporting, to the use of social media to communicate with investors and other stakeholders.

I’ve broken the interview down into smaller ‘chunks’ of discussion, so that you can quickly find particular points you’d like to hear about, but I’ve also included the whole interview and a transcript.

Part 1: Web reporting: communication of risk management online

Key points:

• the importance of compliance: minimum requirements
• the advantages of web reporting and different technologies
• the split between annual report and web reporting
• the desirable frequency of updates to the corporate story

Download audio file (transparency-matters-part-1.mp3)

Length: 5:17
Download: Transparency Matters part 1

Part 2: How can a company show that they take risk management seriously?

What should be communicated, where, and how often:

• attitude to, and appetite for, risk
• who owns the risk?
• the risk process: management, mitigation, explanation
• integrated reporting of risk: who does it well and the challenges involved

Download audio file (transparency-matters-part-2.mp3)

Length: 4:47
Download: Transparency Matters part 2

Part 3: Regulation, risk, and responsibility

Key points:

• response to the Walker report
• investor want to understand the risks a company faces
• environmental risk and CSR reporting
• GRI, XBRL and integrated reporting

Download audio file (transparency-matters-part-3.mp3)

Length: 3:17
Download: Transparency Matters part 3

Part 4: Transparency, technology and communication

Key points:

• do all companies worldwide really want to communicate?
• use of social media to communicate information about a company
• collaborative content and the importance of the corporate website
• use of new technologies to change the approach to communication
• difficulties of true transparency

Download audio file (transparency-matters-part-4.mp3)

Length: 7:50
Download: Transparency Matters part 4

Part 5: Corporate governance and the corporate website

Communication of corporate governance on the website:

• who does it well – and how?
• the ideal…

Download audio file (transparency-matters-part-5.mp3)

Length: 8:58
Download: Transparency Matters part 5

Part 6: The new governance code, regulators and “the fireside chat”

Key points:

• the importance of the new code
• the difficulties ahead for our ‘comply or explain’ approach
• proxy voting agencies: the new stakeholder to consider

Download audio file (transparency-matters-part-6.mp3)

Length: 6:05
Download: Transparency Matters part 6

Part 7: What next for corporate governance?

Key points:

• importance of the ‘comply or explain’ approach to governance
• engaging with investors – and investors engaging with governance
• creating a stewardship culture

Download audio file (transparency-matters-part-7.mp3)

Length: 4:12
Download: Transparency Matters part 7

Here’s the whole interview, for you to listen to while walking the dog, or on the tube; and the transcript, for those who prefer to read.

Download audio file (transparency-matters-interview-full.mp3)

Length: 40:20
Download: Transparency Matters (whole interview)
Download: Transcript

Thanks to Mark for taking the time to talk to Paul about transparency, corporate governance, and reporting.

Who were we speaking to?

Mark Hynes runs Transparency Matters Ltd, which provides highly specialised assistance to listed companies and those supporting them, with consultancy and education in regulatory disclosure, best practice corporate communications and investor relations strategies. He has 30 years experience in the financial news and information sector. He started his career as an investment banker, joined the Economist and subsequently was appointed a Board Director of the Financial Times, spending 18 years in continental Europe, the US and Asia. He then joined PR Newswire, where he continues to consult. Aside from his native English, Mark speaks fluent French and German.

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 Corporate Eye

It’s hard to know where the boundary of investor relations activities ends and that of corporate governance starts up. Many of the things each area is concerned with tend to overlap. It is the investors (shareholders) who vote upon management that runs the company and major decisions such as mergers and changes to a company’s charter documents. If for no other reason than good public relations, corporations wish to appear to be sensitive and responsive to shareholder concerns about how the company is governed.

Yet when you are in the trenches of day-to-day investor relations, it is hard to find analysts that get very concerned about corporate governance. The vast bulk of investor relations activities are concerned with what the company has recently done to impact earnings, cash flow and the balance sheet and what the company plans to do in the future to affect those items. Governance is almost never brought up by institutional analysts unless there is a major vote pending. Even then it is more likely that the company will initiate the conversation about governance, seeking to understand investors thinking on the subject so as to avoid the embarrassment of losing a vote.

What all this means in the context of investor relations web sites is that the information of governance should be readily at hand, but not necessarily cluttering up your main IR site where everyday information is the stock in trade. In the past ten years most companies have created separate governance sections on their websites, covering everything from the composition of the Board to Articles of Association. These sections can be quite extensive and it makes sense to have them in a separate section. But it also makes sense to make them easy for investors to find without wandering all over the main site in search of them. The best way to do this is simply to create a link on the investor relations home page (and other relevant pages within the IR section) back to the governance section.

Vodafone, the telecoms company, does a nice job of executing this strategy. When you first arrive at their investor relations section, scrolling over the top banner causes a drop down menu to appear, as shown below, giving the reader the opportunity to go to the governance section, if that is their need.

Clicking on the link brings investors to Vodafone’s extensive governance section, shown below, and saves them the hassle of trying to figure out whether Governance is listed under sections with different names such as “About Us” “The Company” or some obscure tab. It may be a small thing, but when an investor is interested in your governance issues is not the time you want to annoy them by making the information hard to find.

In this series:
Previous post: Annual General Meetings
Next post: Management

• TATA Group – A company that lives integrity
• What Makes for Effective Investor Relations Sites? Part 31: Annual General Meetings
• What Makes for Effective Investor Relations Sites? Part 29: History Provides Context
• Social Media And Corporate Governance
• Corporate Governance, Ostriches and Black Swans

 Corporate Eye