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At a macro level, there is a growing sense of connection between society, business and government, with more responsibility and expectation placed on companies. This is increasing the need for transparency and trust between business and wider stakeholders and intensifying the spotlight on the value companies create for stakeholders beyond profits.
Our UK counterparts have released their 19th annual Corporate Governance Review, in which they assess the reporting of applied governance practices, as well as how companies have shaped business models, cultures and decision-making structures to drive results over a sustained period.
This report provides salient insights for Boards in Australia, as despite having a different Code in place that we report against, the key themes resonate with what we’re seeing here – purpose, culture, emerging risk management, stakeholder engagement, board effectiveness, remuneration, ESG, diversity and succession planning. It is also a strong indicator of what companies should be focusing on in the coming year.
Boards and senior management have a role to play in defining, embedding and monitoring purposeful culture. More companies are considering how corporate culture contributes to value creation; for example, by promoting cooperative or sharing cultures, improving attitudes to health and safety, engendering employee respect and retention, and improving customer service in an effort to build loyalty. However, the main challenge appears to be effectively assessing and monitoring culture.
While we have seen the quality of risk reporting strengthen over the years, the COVID-19 crisis has brought into question whether risk identification processes are challenging enough, when looking beyond the immediate horizon. COVID-19 has refocused boards on business resilience and emerging risks.
Companies who effectively assess the issue focus on procedures and processes for identifying risks, rather than outlining what their emerging risks are and how they will manage them.
In the UK, it seems that companies are now paying more attention to reporting environmental and social issues relevant to the business, however limited detail is provided on their impact and/or strategic importance to the business model. Early research indicates that much in this area is rhetoric as there is limited evidence to demonstrate how aspects of ESG are embedded into the wider business’ thinking. Similar to emerging risks, there is an overarching question of accountability.
In Australia, this area is not widely reported on – however we could see this change as community standards on climate and social responsibility evolve.
When reporting on succession planning, few companies explain how they aim to address the knowledge, experience and skills needed in future, so the business can deliver against strategy while responding to challenges beyond the horizon. Overall, boards rarely (4%) refer to how directors’ skills are relevant in the context of continuous change.
There has been a growing focus on wider stakeholder engagement. One factor attributed to influencing this is the growing societal pressure spurred on by the COVID-19 pandemic, which has driven increased attention to the role business plays with regard to the individual, society and government.
While not outlined in the UK Corporate Governance report, we felt this was an important risk to highlight for Australian Boards as IT and Cyber Security is essential for security and privacy. Businesses are under increasing scrutiny over their privacy policies and practices, and many Australian companies are affected by the mandatory data breach notification scheme. With financial penalties of up to $2.1 million for corporates and $300,000 for directors, understanding your data, potential areas of risk, and having a plan in place is crucial to the financial status and reputation of all businesses affected. These penalty amounts are currently under review and it’s no secret the Government is proposing increasing this to $10m. In addition, Australian organisations should be prepared for penalties to increase on a global scale. You can find out more here.
For Financial Services organisations in particular, this is an increasingly important issue for boards. APRA has released a five-year cyber security strategy which will also impact third-party IT suppliers, fund managers and payments companies. APRA has called on bank boards to undertake an external audit to review compliance with APRA’s prudential standard on cyber security, CPS 234, saying too many boards still lack visibility or understanding of the growing risks and “fail to grasp why urgent action is required”.
There is much pressure on companies to identify their “purpose beyond profit”. In the US, the CEOs’ association, Business Roundtable released a statement in 2019 on the purpose of a corporation, committing its members to serve all of their stakeholders. In Australia, Adhering to an ethical code comes the idea that a profession has a purpose beyond profit. This purpose, which includes acting in the public interest, is essential for a profession to maintain its social licence to operate.
Defining purpose not only acts as a guide for stakeholders but provides a framework for how decisions will be taken to create and protect value over the longer term. Having a clearly defined corporate purpose is intended to shape long-term thinking, which in turn helps inform the use of capitals and some of the principal and emerging risks to the business and its culture.
The report indicates that many statements are more akin to strategic straplines; these show intent but include little detail on how companies embed purpose to provide guidance and decision making clarity. Just 6% of companies measure progress against their corporate purpose; even fewer link delivery against this purpose to executive remuneration.
This year’s research reveals encouraging trends and opportunities for engagement, but there have also been new and emerging challenges – including the COVID-19 pandemic, an economic recession and wider public considerations. In preparing for 2020 and 2021 year-end reporting periods, businesses need to plan and consider how they integrate output in order to simplify, demonstrate accountability and transparency in decision-making and outcomes, while providing sufficient information around the leadership and value creation ‘USPs’.
