Better corporate culture, not more disclosure, the goal for better governance, says expert

Although disclosure can "nudge companies towards better practice", it is better corporate culture, led by the chair and the company board, that will make the real difference to UK corporate governance standards, according to corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com.

"What we certainly don't need is more disclosure – HSBC's annual report last year weighed in at 502 pages," said Webster, speaking at a recent industry event hosted by Pinsent Masons. "Rather, it's the lead given by the chair and the board which has to encourage a more open and honest approach to good news, as well as the less good, and to a company's long-term strategy."

"Ticking boxes for the sake of it will never be the answer, but one benefit disclosure can bring is to nudge companies towards better practice. To take one example, the increase in the number of women on the boards of major companies in the last few years is unlikely to have been achieved without the requirement for companies to disclose what they were doing to improve gender diversity. With the Parker Review recently published, the same is likely to happen with ethnic diversity," he said.

A 'green paper' on corporate governance was published by the government towards the end of 2016. The government is seeking views on issues including executive pay; strengthening employee, customer and other stakeholder 'voices' on the boards of listed companies; and enhanced corporate governance requirements for large private companies in response to this paper, and a consultation exercise ends on 17 February 2017.

Corporate governance reform has been central to UK prime minister Theresa May's plans for government since the early days of her campaign for leadership of the Conservative Party. Early speeches set out her support for policies including pay ratios, annual binding shareholder votes on pay policy and the inclusion of employee and consumer representatives on company boards, although not all of these policies have been carried through to the green paper.

Issues relating to boardroom culture and diversity have also been particularly topical ahead of the introduction of new gender pay gap reporting requirements for large organisations in April, and with the publication of the Parker Review of ethnic diversity in boardrooms in November 2016. In its recent annual report on UK corporate governance, professional services firm Grant Thornton found that the percentage of FTSE 350 companies that talk about diversity in areas other than gender in their annual reports increased from 55% in 2015 to 76% in 2016.

"More companies than ever recognise the commercial advantage of effective governance practices and disclosures, yet there remains substantial room for improvement," said Simon Lowe, chair of Grant Thorton's governance institute, who also spoke at the event. "Good quality disclosure is key to changing governance practices, and a large proportion of companies still provide only the bare minimum, complying but not fully embracing the principles of the [Corporate Governance] Code."

The number of FTSE 350 companies reporting full compliance with all provisions of the Corporate Governance Code increased from 57% to 62% in 2016, according to the Financial Reporting Council (FRC), which oversees changes to and compliance with the Code. The vast majority, or 90%, of companies reported full compliance with all but one or two of the Code's provisions, with the provision for at least half the board to be made up of independent non-executive directors least likely to be met, according to the FRC.