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Diageo tops UK corporate governance list

Report compiled by Cass Business School ranks Diageo as the best UK company for corporate governance

by Amy Ripley (Senior Communications Officer)

Drinks giant Diageo, the owner of Guinness, Smirnoff and Johnnie Walker, has emerged as the highest ranked UK-listed company for the quality of its corporate governance in the Institute of Directors’ (IoD) annual report on the health of large company boards, which is supported by the Chartered Quality Institute and compiled by Cass Business School.

2017 Good Governance Report

Now in its third year, the 2017 Good Governance Report examines a range of 47 factors relating to how companies are run, including board diversity, directors’ pay, how long the business has been with an auditor and whether they have a whistleblowing policy.

The number of measures examined has been expanded this year to give an even more comprehensive view of how well the company performs for its shareholders, employees and customers. Uniquely among indices of this type, the IoD’s report combines publically-available data with over 2,000 rankings of the companies given by individuals with knowledge of what good governance looks like, including members of the IoD and the CQI, company secretaries and accountants. The final ranking is weighted based on the perceptions of the different measures, with audit and risk being seen by governance experts as the most important.

Top 10 companies

1. Diageo PLC
2. Aviva PLC
3. GKN PLC
4. Barclays PLC
5. Smiths Group PLC
6.= Prudential PLC
6.= RSA Insurance Group PLC
8. International Consolidated Airlines Group SA
9.= InterContinental Hotels Group PLC
9.= Compass Group PLC

The full table is available on pages 12-13 of the report.

Top-ranked businesses are from different sectors

The relative size of the company seems to have no effect on the position of the 100 companies studied, and the top-ranked business come from a range of different sectors, with the insurer Aviva and the engineering firm GKN coming in second and third place respectively. Overall, energy companies outperformed compared to the average score, while IT companies underperformed. The IoD’s intention in producing the report is to encourage companies to consider a wide range of factors when doing a health check of how well their board and executive are functioning.

The report will be launched at an event featuring panel discussions on good governance with Tracy Gordon, Director of Deloitte UK Centre for Corporate Governance, Daniel Godfrey, Chief Executive of the People’s Trust, Jennifer Sundberg, Co-Chief Executive of Board Intelligence and Helen Stephenson, Chief Executive of the Charity Commission.

Cass authors: Report is important step

Report authors Professor Andrew Clare, Dr Nicholas Motson and Professor Paolo Volpin, Cass Business School said:

“Over the past 20 years, academics and practitioners have made several attempts at producing Corporate Governance (CG) indices, so far with limited success. Existing indices have been criticised for adopting a kitchen-sink approach where large numbers of indicators are combined using an arbitrary weighting scheme to produce CG index scores for companies.

“Our approach to the challenge includes two important innovations. First, we use a list of corporate governance indicators that go beyond simple compliance with the UK CG code, by augmenting the usual set of indicator data with information contained in annual reports and other sources. Second, the weights we assign to five broad corporate governance categories to calculate our scores are derived from a unique survey of stakeholder views about the corporate governance regimes of the rated companies.

“This year’s results indicate that different components of CG have a differential impact on stakeholder perceptions of CG. Our results this year confirm the results of 2016’s study: that the indicators we have included as measures of Audit and Risk/External Accountability appear to exert the greatest impact on governance perceptions. In contrast, the indicators we have chosen to measure Board Effectiveness appear to have only a relatively weak correlation with governance perceptions and are therefore less weighted in our calculations.

“This is likely because Board Effectiveness is hard to measure outside the boardroom, and we should redouble our efforts to identify indicators that better capture this important aspect of good governance. Having measured the degree to which the objective indicators of CG are correlated with perceptions of CG, our final model shows that Diageo, Aviva and GKN generate the highest GGI scores of the large listed companies. We believe that our approach is an important step forward in assessing the quality of corporate governance in the UK and, we hope, is an important contribution to the Great Governance Debate.”

Comment from the IoD

Ken Olisa, Deputy Chairman of the IoD, and Chairman of the Good Governance Report advisory panel, said:

“Corporate governance has rarely been out of the headlines since we first set about creating a way to rank the UK’s top companies’ performance in 2015, and with each scandal pressure grows for the imposition of tougher regulation along with calls to report statistics of dubious merit. This is the wrong approach.  Corporate governance is about much more than compliance – it’s about achieving competitive advantage.

“Business is a form of sport. As with any sport, championship requires a comprehensive understanding of the human, the equipment, the arena and of course the rules.  An obsession with the statistics of only one of those elements won’t win medals. And equally, conformity in which all of the participants are required to act in identical ways is antithetical to competition.

“In the same way that a racing newspaper will analyse runners’ form by reference to a set of performance related criteria, the good governance initiative is intended to assist Boards to understand the implications of the many indicative factors which, in aggregate, determine the quality of corporate governance.

“Our hope is that British boards will embrace the underlying subtleties of the third Good Governance Index and so include as a regular agenda item, discussion of how well their company’s high-level system of direction and control is contributing to the business’ success.”

Comment from the Chartered Quality Institute

Estelle Clark, Director of Policy at the Chartered Quality Institute, said:

“This is an excellent start to the good governance debate, and we must now extend the discussion into the FTSE 250 and beyond, into private companies and even public sector organisations. The report clearly shows that there is no correlation between company size and effective corporate governance, which demonstrates that governance is not a matter of resource but of culture and will.”

Mrs Clark believes that the report also challenges the assumption that corporate governance is solely a financial issue.

“Corporate governance is much more than the narrow issue of executive pay and the misuse of zero hours contracts. Companies with potential governance issues will not find the remedy solely in the audit and remuneration committee.”

She continued:

“Society’s view of what constitutes good governance is changing, moving away from the narrow definition of financial performance towards a broader definition that takes into account an organisation’s impact on all its stakeholders. The 2017 Good Governance Report has included measures of whether a company is a signatory of the UN Global Compact and the Prompt Payment Code, for example.”

Mrs Clark believes the challenge facing many organisations lies in operational governance below board level.

“A number of the key indicators in the report relate to the ability of organisations to take the aims and ambitions of the board down into the body of the organisation. High profile operational governance failures, such as Bell Pottinger and Uber have been immensely damaging.”

Mrs Clark concluded:

“We want the 2017 Good Governance Report to be the spark that encourages companies and organisations to embrace and debate governance at all levels.”

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