Governance is not about compliance, but helping firms perform better: UK expert

Singapore

BOARDS of listed companies should not view governance as a burdensome regulatory requirement, but rather a tool to help their business perform better, a leading UK expert on governance and board evaluations said.

"Whatever the size of a company, if they look at corporate governance from the perspective of helping the company perform better, and protecting its reputation, then the investment in governance will see a return," said Richard Sheath in an interview from London.

Mr Sheath is a board effectiveness specialist and a director of Independent Audit, a governance specialist which has evaluated more than 300 boards including those of many FTSE 100 companies, subsidiaries of non-UK organisations and global businesses.

He believes that boards have to understand that corporate governance goes beyond ticking the right boxes and compliance.

"If the board sees governance as compliance, it is not going to have the desired effect. However, if the board sees it as something to help the organisation perform better, to do the right thing and behave appropriately, then, there is an internal and strategic value to governance, and that will help drive the practice and culture," he explained.

On the common complaint by smaller companies about the increasing costs of compliance, Mr Sheath believes it is an unavoidable cost for listed companies.

"Listed entities enjoy the liquidity in their shares and the access to wider sources of capital. If they don't like the cost of it, then they have to give up the benefits. You can't have both."

"So the question then is to accept that there is such a cost and look at how to turn this into a benefit," he suggested.

He cited an example in the rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002, a law that the US Congress passed on July 30 that year to help protect investors from fraudulent financial reporting by corporations.

When it was introduced in the wake of accounting scandals involving publicly traded companies such as Enron Corporation and WorldCom, there were many years of complaints about the costs of compliance, burden of documentation, costs of paying consultants, among others.

"Now that it has been in place for 17 years, a lot of companies are recognising it has strengthened their control processes and enabled them to operate more effectively. They benefited from it," Mr Sheath said.

Similar reaction was seen when the UK implemented the Senior Managers Regime (SMR), a part of UK financial regulation aimed at increasing personal accountability of senior people in the financial services industry. It came into effect for banking and insurance firms in March 2016.

"People also complained initially. But now, they found it helped because it clarifies responsibility."

Mr Sheath believes that boards' attitude to environmental, social and governance (ESG) policies will also change. "Boards are now taking initiatives to make sure the company is applying strong ESG standards - and seeing the strategic benefits," he added.

A regular reviewer of internal audit and risk governance, Mr Sheath was concerned about the market's increasing expectations of non-executive directors.

"I think the trend is a bit dangerous because non-executive directors only have a periodic view of the business, meet a few times a year, do not have a day-to-day view of the business and are limited in what they can do which is dependent on the information provided to them by the management,'' he said.

"Typically, they are not experts in the business. It is quite a difficult role. One danger is regulators and shareholders perhaps are expecting too much from non-executive directors,'' he reckoned, adding that companies and regulators have to ensure that they do not have unreasonable expectations of non-executive directors.

Asked to share his thoughts on setting formal quotas for female representation on boards, the man who spent his early years at the Bank of England and HM Treasury before working with PwC as a risk management partner in Russia, South America and London, shared the UK experience, where having a hard target forces boards to look harder and find the right people.

"It actually achieved a lot, and people are comfortable that the standards have been maintained because the appointments are based on merit,'' he said.

"It is vital that firms promote diversity, not just gender diversity. Boards have to take a leadership role in driving diversity because the danger is if it doesn't, then the organisation doesn't move forward,'' he warned.