IoD index to put spotlight on worst corporate governance

http://www.theguardian.com/business/2015/jun/16/iod-index-corporate-governance

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Banks, supermarkets and service companies have the worst corporate governance in the FTSE 100, according to an index of boardroom behaviour being compiled by the Institute of Directors.

The IoD is constructing the index after a string of scandals, ranging from the banking crisis in 2008 to the accounting problems at Tesco, in a bid to predict the next reputational hit to the UK’s biggest companies.

“The reputation of corporate Britain took an almighty kicking during the financial crisis, and several years later, is still on its knees,” said Simon Walker, IoD director general.

“Any attempt to restore public faith in business must start with good corporate governance, but focusing solely on how companies report compliance with a framework, while not looking at underlying behaviour, will simply not do the job,” he said.

The index looks at adherence to self-governing codes which date back to the Robert Maxwell pensions scandal, while also taking account of the views of a survey of 400 IoD members and accounting bodies. The IoD has 38,000 members ranging from bosses of multinationals to entrepreneurs running start-ups.

According to initial IoD findings, Barclays, HSBC, Standard Chartered, Royal Bank of Scotland and Lloyds Banking Group are ranked in the bottom 16 along with supermarkets Tesco and WM Morrison, services company G4S and sports retailer Sports Direct.

In the top ranking are the likes of technology company ARM Holdings, satellite company Inmarsat and oil company Shell.

The City’s corporate governance code operates on a comply-and-explain basis and sets out standards for the composition of boards, such as splitting the roles of chairman and chief executive. But Ken Olisa, the businessman who is leading the IoD project, said the code “ignores the nuance of corporate governance”.

Olisa was ousted from ENRC, a Kazakh mining firm and a former member of the FTSE 100, in 2011 and has been aiming to create a corporate governance index for the last two years.

Related: Ken Olisa: entrepreneur, philanthropist and good governance advocate

He said the corporate governance codes were not enough to police boardrooms. “Identifying symptoms of governance failures, and then drawing up check lists to eradicate them leaves us in the position of always fighting the last battle. The financial crisis was not caused by a lack of rules, it was caused by behaviour which was clearly egregious to any outside observer. Unfortunately the UK seems to have learned little since the crisis, sticking to a prescriptive set of attributes aimed at creating the cardboard cut-out perfect company,” he said.

IoD worked with Cass Business School and consultancy Z/Yen on producing the first index, which throws up a number of anomalies. For instance, according to the survey of IoD members, Intertek came top of the corporate governance rankings even though last month, two months after the initial survey closed, the product testing company was the only FTSE 100 to have its remuneration report voted down. When the company was measured in terms of its compliance with the City code, Intertek fell into the mid-tier of the index.

The IoD intends to publish a fuller report on measuring corporate governance at the end of the year.