Towards good governance

The Great Governance Debate: Towards a good governance index for listed companies, launched by the Institute of Directors in the UK, sets out a new framework for assessing corporate governance. This index is designed to move away from a focus on compliancetowards a more complex measurement which combines public perceptions with a range of objective factors.

The report sets out the initial findings from six months of research into the measurement of corporate governance in UK-listed companies. Its purpose is to encourage the study of good governance and stimulate debate on the importance of corporate governance in rebuilding the reputation of the UK business community.

The report follows several other attempts in the UK to establish a Corporate Governance (CG) Index. These have been relatively unsuccessful as companies have learned to “game” the index, according to reports. Not surprisingly, the study concludes that corporate governance is difficult to measure and outcomes are even more difficult to predict. 

Interestingly, the study does not rely on publicly availably company reports. This alone may cause concern about the ultimate value. The researchers use a new list of indicators that are not related to the UK Corporate Governance Code. These “instrumental factors” include board effectiveness, audit and risk, remuneration and reward, shareholder relations, stakeholder relations and business environment. Evaluation against these factors included both objective, numerical data and the results of stakeholder perception surveys.

No single instrumental factor stands out as having a strong correlation with governance. The most significant single-factor correlations are the percentage of shares held by a single shareholder and position in Britain’s Most Admired Companies rankings. 

Launching the report, Ken Olisa, chairman of the advisory panel, said. “It is simply not correct for a company to say that because they have ticked certain boxes, they show good governance.

Now is the time for some bold thinking on how we define and measure governance, including the recognition that it is essentially an organic process involving the interaction of groups of people.”

To download the report, click here.