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Boards of companies have a clear set of legal responsibilities which define their role, how they should execute that role, and how their performance should be judged. Hence, they need to be served by appropriate information systems to enable them to carry out their duties effectively. There have been plenty of examples in recent years of boards failing to spot potentially catastrophic problems in time to head them off. So, what information should an effective system provide to the board, and how should a system providing that information be structured? Let’s follow a logical process to arrive at the answer.
Board responsibilities
In the UK, (and therefore, to a greater or lesser extent, all the countries which derive their company law and corporate governance from the UK model), the generally accepted responsibilities of the board are defined in S 172 and related sections of the Companies Act 2006, and can be summed up as being to:
- look after the future well-being of the company
- take account of the interests of key stakeholders in the company
- stay within the law and regulations governing the activities of the company
- behave honestly and responsibly.
Later, in the UK Companies Act 2013, S 134, boards were mandated to conduct regular self-evaluations of themselves, their committees and the individual directors, and report the results in their annual reports to shareholders. Additionally, larger companies were required to publish a strategic report indicating how the directors had performed their duty to promote the success of the company, including information about environmental impact, employees and social policies.
As the European Commission explains, a large part of EU company law is now codified in a single Directive, Directive 2017/1132 – Digital Company Law making more information about companies publicly available and ensuring that company information in business registers is reliable and up-to-date.
U.S. companies are governed by state law, federal statutory rules, including the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (the “Exchange Act”), other federal regulations, including the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), and regulations of various government agencies, including those issued by the U.S. Securities and Exchange Commission (“SEC”) and stock exchanges that impose requirements on companies whose securities are listed on them.
Australian companies have a federal statute: the Corporations Act 2001, and the common law which include rules relating to the nature and form of a company’s constituent documents, and the roles and powers of the board of directors.
The Australian regulator, the Australian Securities and Investments Commission (ASIC) enforces directors’ duties, and the Australian Securities Exchange (ASX) ensures that companies listed on the ASX comply with listing rules issued by the ASX.
Japan has the Companies Act 2005, which sets out the principles governing the rights and obligations of management and owners, and rules regarding the disclosure of information. The Financial Instruments and Exchange Act sets out requirements for filing annual securities reports, and there is also Japan’s Corporate Governance Code.
In South Africa there is King IV, which covers corporate governance, board duties and disclosure and reporting.
Finally, there are the G20/OECD Principles of Corporate Governance setting out the key building blocks for sound corporate governance.
Parties looking to the board for accountability
So, who are the parties to whom the boards are expected to be accountable, and hence to whom they should be reporting performance in relation to their respective interests? We can group the primary interested parties as follows:
Specific Stakeholders
The key stakeholders are:
- private shareholders and investing institutions, who have bought shares and are concerned about the value and safety of their investment and dividend returns
- customers, who are concerned about the price and quality of what they have bought, timeliness of delivery and after-sales support
- employees, whose rate of pay, employment conditions and security of employment are what matter
- financiers, who need to know that the funds they have provided are safe, that they will be repaid on the due dates and that interest payments will be made in full and on time
- suppliers, whose concern is that they will be paid in full on the due date
- local communities, whose well-being may be affected by the company’s activities in their area.
Regulatory authorities
These include industry regulators, such as the UK’s:
- FCA (Financial Conduct Authority) addressing the financial services sector with regulations such as:
- Individual Conduct Rules
- Consumer Duty
- FRC (Financial Reporting Council) addressing corporate reporting by auditors, accountants and actuaries with regulations including:
- Corporate Governance Code
- Stewardship Code
- UK Accounting Standards
- Ofgem governing energy suppliers
- Ofwat governing water companies
Professional associations
Such as
- Law Society
- ICAEW (Institute of Chartered Accountants in England & Wales)
- RIBA (Royal institute of British Architects)
Tax authorities
In the UK, HMRC dealing with reporting for tax purposes, such as
- Annual accounts
- Corporation Tax returns
Legal authorities
Such as Companies House, requiring
- Annual reports
- Details of companies and their directors and senior officers
All countries have regulatory bodies, such as the various departments of the European Commission, setting out rules for organisations carrying out activities within the EU, such as
- DORA (Digital Operational Resilience Act)
- ESRS (European Sustainability Reporting Standards)
And there are regulators in the member countries of the EU,
In the USA there is the SEC and the various authorities in the different states, and there are similarly regulators and reporting authorities in most countries of the world.
Pressure groups and monitoring organisations
Focused on particular issues, such as:
- Climate:
- TCFD (Task Force on Climate Related Disclosures)
- ESG (Environment, Social & Governance):
- MSCI and others
- Also bodies concerned with CSR (Corporate Social Responsibility), GRC (Governance, Risk & Compliance) and DEI (Diversity, Equity & Inclusion)
Whistleblowers
In regard to whom companies are expected to provide a safe and secure reporting system
Trade associations
Whose function depends on receiving accurate, relevant and timely information from members.
Information demanded from each and current reporting systems
All these bodies are looking to the boards of companies for information to serve their own particular needs, and a range of systems has bees set up to address these needs, including:
- accounts and records of financial transactions
- sales and marketing performance
- operational efficiency reports
- HR and employee aspects
- PR and local and national consumer research
- board evaluations
- strategy studies
- market research studies
- risk management reports
- ESG and sustainability reporting.
The totality of these is huge, and it means that the board relies on divisional and functional management to present reports relating to their part of the company’s activities. Only the financial reporting addresses the totality of the company’s activities in an all-embracing way, and then only in regard to their financial impact and financial implications. The Annual Report is essentially a financial presentation of the board’s supervision of the company.
Periodically an attempt will be made to address the totality of the company’s goal, its market offering and its operational performance and capabilities through a strategy study. Meanwhile, the annual revisiting of the business plan is an updating exercise.
So how to address the need for the board to be kept up to date on the totality of the business, in a manageable way, with a forward-looking approach?
The over-riding objective
To fulfil its duties under the Companies Act, the board needs the information to enable the directors to supervise management to ensure that:
- the company’s future is secure
- the interests of the key stakeholders are properly taken into account
- the company is behaving properly
- the law and regulations are complied with.
So, how to put the multiplicity of reporting systems together in a logical way?
Total holistic board reporting
A comprehensive, holistic board reporting system that meets the following needs:
- is one whose messages can be assimilated quickly and easily by busy directors
- is trustworthy and reliable and avoids organisational capture
- comprehensively captures the views of key stakeholders in a continuous update
- addresses the future of the business rather than the past.
So, what are we describing?
We are defining a survey-based approach which assesses a company’s performance in a three-pillar reporting system:
- Culture
- Business model
- Compliance
The surveys should be continuous, and ask the key stakeholders to express their views from their own perspective and in regard to their own expectations from the company, against a set of appropriate criteria. This approach:
- by-passes internal capture through direct, external stakeholder engagement and keeps stakeholders’ interests in the frame
- identifies problems which might otherwise be hidden until it’s too late
- spots opportunities which organisational silos can prevent from being followed up.
This continuous survey and reporting system has the effect of keeping the Board looking forward and up-to-date, and is deliberately:
- light touch, taking the ‘sniff test’ approach
- comprehensive and holistic to cover all aspects of board duties
- providing an early-stage trigger for underlying heavyweight systems to address in depth the issues emerging:
- looking forward for opportunities and risks
- not backward looking based on historical transactions
Through a structured set of questions to each stakeholder group, it assesses total, holistic performance under the three pillars above:
- Culture, covering issues relating to:
- environment, sustainability, etc
- social, employment standards, etc
- corporate culture, ethical standards and behaviour
- Business model, addressing the:
- continuing validity of the company’s goal
- continued effectiveness of the strategy to achieve it
- appropriateness of the organisation and adequacy of resources, both personal and financial to deliver it
- quality of the systems, controls and risk management
- quality, transparency and accountability of the reporting systems
- Compliance, checking performance in regard to:
- company law
- the company’s constitution
- regulatory codes
- industry regulations.
Reporting direct to the office of the chairman, the system is designed to provide an up-to-date, on-going, light-touch monitoring of the company’s performance, focusing on the long-term future of the business and casting an independent light on the performance of management in delivering the goal set by the board.
The progress of projects triggered by this continuous monitoring will then be assessed in subsequent iterations of the survey, helping the board fulfil its duty to ensure that management keeps the company on track.
This is the system that ACG designed, and which it has been building with its partner, Dynamic Responses Software.
So directors using DRS’s InfoShare system are informed by continuous snapshots (which clearly include past experiences) and a forward-looking, predictive set of tools that equips them to fulfil their fiduciary duty towards the company which employs them, and empowers them to carry out their “duty to exercise independent judgement” (section 173) and “reasonable care, skill and diligence” (section 174) which the Companies Act demands of them.
Additionally, if at some stage disaffected shareholders, or even a liquidator, challenge the directors with not fulfilling their duty under section 172 to promote the success of the company, taking into account the interests of the wider group of stakeholders, they will be able to defend themselves much more easily if they can point to the InfoShare shareholder engagement channel as evidence that they did their reasonable best to comply with the law. And since the standards expected of directors are tightening all the time, and their indemnity insurers are scrutinising behaviour much more closely before paying claims, adopting this approach can only be in their best interests.
