Understanding Your Evaluation of Each Principle of the UK Corporate Governance Code 2018 – Principle A
This is the first of a series of articles where we will unpack some of the desired outcomes embedded in the principles of the UK Corporate Governance Code 2018 (“Code”). The Code requires the Board to focus on how the Principles have been applied, articulating what action has been taken and the resulting outcomes.
To do this a Board needs to understand what outcomes it should be striving for.
The Code, being principles-based as opposed to rules-based, sets best-practice goals in the form of desired outcomes as well as a set of processes.
The desired outcomes are stated as lofty and praiseworthy goals; the processes are, in general, a compliance list.
We are principally concerned with the desired outcomes, which by their nature may never be fully achieved by the Board, but alignment with which must nevertheless be continuously strived for.
The desired outcomes are not only what the regulator would like to see Boards striving for but reporting against them is what an interrogative stakeholder will use to assess the raison d’etre or purpose of a company, as well as the direction of its moral compass. Therefore, formulating an appropriate response to every desired outcome should be an important and necessary annual core focus of the Board.
This article will deal with Principle A, which gets straight to the point. Like most of the Principles, it is worded in a manner which requires the Board to deliver a considered, relevant and narrative response. Anything remotely ‘tick-box’ in approach or smacking of self-assuredness could be deemed inappropriate, leaving a Board open to well-earned criticism for failing to understand the purport of the Principle.
So how to formulate a considered, relevant and narrative response?
A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
We start by extracting each of the desired outcomes embedded in the Principle. There are several:
• an effective Board;
• an entrepreneurial Board;
• a Board which promotes the long-term sustainable success of the company;
• a company which generates value for shareholders;
• a company which contributes to wider society.
Taking only the outcomes above, we review the eight provisions in this Section 1 on Board Leadership and Company Purpose for guidance on the depth of issues to be considered in building the Board’s related outcome narrative:
Principle A, Provision 1
– an effective Board;
o Prov 1: The Board should address the sustainability of the company’s business model
o Prov 1: The Board should address how its governance contributes to the delivery of its strategy
– an entrepreneurial Board;
o Prov 1: The Board should assess the opportunities available to increase or ensure future success
– a Board which promotes the long-term sustainable success of the company;
o Prov 1: The Board should assess the basis on which the company preserves value
o Prov 1: The Board should assess the risks that could interfere with the future success
– a company which generates value for shareholders;
o Prov 1: The Board should assess the basis on which the company generates value
– a company which contributes to wider society.
To complete this exercise the rest of the seven provisions need to be mapped in the same way.
Steps to own delivery against the outcomes:
Above we have shown the beginning of the matrix needed to ensure the narrative is valid, robust and will stand up to scrutiny. In the above example, we have linked to these desired outcomes only the requirements in Provision 1 as an example of how to address this second step.
The third step would be responding to this matrix complete as relevant from all eight Provisions as they are relevant, which evidence that these desired outcomes are not just compliance processes to tick off, but factors which, if fully considered, go to the core of the business, its purpose and its strategy.
We have evidenced how each of these desired five outcomes for the first Principle are separate lofty and praiseworthy goals requiring the annual considered attention of the Board.
The fourth step would be to discuss the Board’s position regarding each outcome, a process which could be done in the form of a gap analysis – structured approach or a discussion – conversational approach.
The fifth step would be to formulate the general steps a Board should follow in order to strive for improving or addressing the gaps evident in each desired outcome.
The sixth step would be the Board, with the guidance of the Company Secretary, to define any actions needed to deliver progress on whichever outcomes this is required.
The seventh step would be Board monitoring and holding to account actions to deliver the outcomes.
The last step being the creation of the narrative annually of the company’s mapping against these outcomes.
Key message of Principle A
In our view, Principle A defines the highest order of achievement – an effective board.
Therefore, directly in relation to Principle A, we would expect the Board to:
– include a ‘tone at the top’ statement which defines how the Board will lead, set its moral compass, what it expects delivered and how the company should embed this culture, such that delivery of the outcomes becomes seamless
– be complemented with competencies to allow for entrepreneurialism to flourish within the risk appetite of the business
– have risk assessment competencies at board level to consider the corporate and reputational risks, combined and contagion risks and the risk register as built by the company
– have the right composition and structure to deliver and effective board
– be led by an effective Chair, aligned to the business cycle of the business, delivering a clear message of the appropriate business culture
– consider the shareholders, but equally in terms of the Companies Act 2006, Sections 171 to 177, particularly S 172, all stakeholders, both internal and external
– include in the stakeholder matrix, the wider society that provides the purpose of the company
– consider its assessment of success as more than a forecast in the form of extrapolated numbers, but to include robust strategic planning, delivery to defined plans and accountability
– review the policies, procedures, plans and other relevant documents that will support embedding the actions and outcomes, but also the cultures desired.
Each year the Board will assess its alignment to the outcomes, aiming for continuous improvement.
Stakeholder assessment of the Board:
A Board needs to keep in mind that an interrogative stakeholder will scrutinise any disclosure relating to these steps and processes, or lack thereof, to assess the credibility of the Board’s statements around any desired outcome.
Genius’ Code Outcomes Plan
Our Outcomes Plan will create the framework for a Board to deliver against and meet the requirements of Principle A. We will support the matrix formulation, the gap analysis, the determination of actions, assessment of accountability and finally supporting the creation of the robust and supported narrative against the outcomes.
Authored by John Nassel-Henderson and Sharon Constançon