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Fresh Approach to Corporate Governance

Companies need to be on the front foot when creating their corporate governance codes, according to joint research by the Institute of Directors (IoD) and Cass Business School.

Companies need to be on the front foot when creating their corporate governance codes, according to joint research by the Institute of Directors (IoD) and Cass Business School.

The report takes a fresh look at governance practices and for the first time, combines external perceptions of whether a company is well-run with the objective factors normally used to judge good governance.

Professor of Asset Management, Andrew Clare, said: “This research is quite unique. The methodology has been designed specifically to overcome the ‘box ticking’ approach to measuring the quality of corporate governance practices. This in turn means that companies cannot ‘game’ the assessment process since it relies predominantly on the perceptions of governance.”

The panel overseeing the project looked at instrumental governance factors including business performance, audit arrangements, directors’ pay and shareholder relations, and undertook a survey of business people’s perceptions of the UK’s biggest companies.

In a new approach, the panel then combined this information in an attempt to achieve a more impartial and deeper understanding of the governance of these companies - an important step towards creating an index of listed companies which will aid investors and directors in their decision-making.

Professor of Finance, Paolo Volpin, said: “The challenge with this approach is that the quality of the index depends entirely on the quality of the replies in the survey. The survey that we have just concluded included 400 replies, which are enough to build an index but not enough for the index to be statistically robust. A more robust index will be available when we complete the next survey, in six month time.”

Ken Olisa, Chairman of the advisory panel for the report, said that identifying symptoms of governance failures and drawing up check lists to eliminate them puts businesses in the position of “always fighting the last battle”.

He said: “One of the key findings of our new research is that no one factor dictates whether a company is well-run, whether that’s the number of non-executives on a board or how often the auditor is changed. 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. The IoD intends to lead the way in creating a better way of looking at governance that gives investors, employees and the wider public greater confidence in the transparency and accountability of our biggest companies.”

A company’s corporate governance index is its mechanism by which it is controlled and directed. A full report and robust index is expected to be published later this year.

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