Corporate Reporting blog

Effective governance - what does the evidence suggest

I thought you might be interested in an article I recently wrote for Governance.

The article focuses on the topical issue of governance and what we need to understand in determining whether the board has done a good job. My argument is that to make this assessment, we need to look at the big picture that is presented in the annual report and ask whether the key elements that make it up and which are critical to business success are coherent, aligned and clearly articulated – particularly around: strategy, remuneration structures, KPIs, risk assessment etc. Our experience is that when they are, they reflect a business that is better managed, has a clearer sense of direction, and knows what it’s about and how it intends to achieve its goals. Perhaps this is an area we should be focusing on as governance models around the world are reassessed and challenged. In the UK, where we have had extensive governance and remuneration reporting for many years, we also need to challenge the model. While many aspects are good, we should also be honest enough to recognise those that have fallen into the lip service/box ticking bucket.

By coincidence, I attended a very interesting presentation last week for Non-Executive Directors. The title of the evening was Risking it All and revolved around a film that has been developed to highlight how easy it is for boards to make the wrong decisions when faced with a challenging issue such as whistle blowing. The discussion that ensued highlighted the importance of board diversity and the tone from the top in determining how boards operate. As I sat and listened I was reminded of an article that Baroness Denise Kingsmill recently published on the subject of Tone comes from the top and why, regardless of all the other processes put in place within a business this is arguably the most critical component. If that tone is right it pervades the organisation, it is the route from which behavioural norms develop and over time defines how an organisation thinks and acts. It gets to the heart of a key question which many organisations are currently trying to ground: "What is right?".

So as we rethink what the ingredients are for sustainable economic activity lets not forget about the tone from the top and behavioural norms. Clearly this is not something that can be legislated for but it may not be beyond the bounds of human ingenuity to think of ways that it might be better exposed to the world at large.

I'd really be interested in your views and ideas.

David

Who's going to pick up the bill?

I saw a wonderful Matt cartoon recently of a person in a restaurant, saying to the waiter, "I'm a banker could you give my bill to one of the other tables". Behind this amusing sketch lies a much more serious issue which more and more politicians and economists are starting to worry about. How much public sector debt will have been racked up by the time the financial system is stabilised and economic activity is back in the black, and who is going to pick up the tab?

I don't know about you but I've lost count of the bail out and stimulus packages, but get frightened by headlines that suggest the level of public sector debt amounts to a national emergency. But what are the real facts, what is the context in which we should be assessing the state of public finances? Well, I thought a recent piece of research from the PwC economics unit entitled Dealing with debt might help clarify the situation. Their analysis suggests that by 2013/14 public sector net debt, excluding the effect of recent financial interventions, will have risen to 65% of GDP (from today’s level of just over 40%). This would be the highest debt level in recent decades although still a long way below a figure closer to 250% after the last world war.

In 2013/14 the UK current budget deficit (excluding net public investment) is estimated to be around 3% of GDP, reflecting a fiscal gap (to you and I an over spend on current income) of some £43bn at today's values. If this gap is to be closed to get back to current budget balance some painful choices will have to be made.  My colleague analysis suggests there are two options:

• Option 1 - a real reduction in total public expenditure of 1.4% per annum on average in the three years to 2013/14

• Option 2 - a real freeze in public spending in the three years to 2013/14, supplemented over the same period by around £25bn of tax increases over and above those already announced.

I don't know what you think, but if I was a betting man, I'd be going with option 2. The question then becomes who's going to pay - individual taxpayers or the corporate sector? I know many of the UK's largest companies are already worried they will be in the firing line being asked to pay a disproportionate part of the bill. The way this issue is approached will be critical to the speed of UK economic recovery and as importantly is something which, if got wrong, could result in more companies dusting off their plans to relocate their headquarters elsewhere in the world. So as government considers who pays what, I hope due regard is given to the real contribution that business makes in terms of the taxes it pays. Too often the focus is on corporation tax and as this year’s Total Tax Survey for the Hundred Group highlights there are other figures we should be focusing on:

• Corporation tax is one of 22 taxes in the UK 
• On average for the Hundred Group, for every £1 of corporate tax, there was another £1.14 in other taxes borne and £3.88 in taxes collected
• In total the Group total tax contribution was £58 billion
• 48.6% of the value distributed by the Group surveyed, was paid to government in taxes borne or collected

Unfortunately, unlike the character in the cartoon I mentioned earlier, passing the annual £40bn bill to someone else in the restaurant isn't a feasible option. But more seriously, as the bill for our decade of excess is shared out, let's make sure we do not shoot ourselves in the foot and put the brakes on the wealth creating engine on which we all depend.  

As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David