Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

The sixth annual Grant Thornton Corporate Governance Review also found that corporate responsibility (CR) reporting has moved into the mainstream, with a huge increase from just 8 per cent in 2006 to 42 per cent of companies now seeing value in obtaining some form of external validation.

Grant Thornton's review of corporate governance disclosure assessed 306 FTSE 350 companies against the terms of the Code and associated guidance in order to determine disclosure attitudes across the index.

Less than 5 per cent of those claiming full compliance (11 companies) provide appropriate disclosures in accordance with Schedule C of the Combined Code.

A further 16 companies were considered by Grant Thornton's experts to have made a full disclosure, although they did not claim to have done so, taking the total of companies complying fully to 9 per cent, compared to 10 per cent in 2006.

Robust explanations 

Simon Lowe, head of Grant Thornton's business risk services practice, says that while not all areas of the Code necessarily require specific disclosure, his firm has always felt a company's annual report is the best forum to transparently communicate some substance to the overall claims of 'best practice'.

He adds that there is some positive news among those companies that do not claim full compliance, 110 of them have embraced the Code's principle of 'comply or explain' by providing robust explanations.

"Less encouraging is that 4 per cent still give no explanation and 34 per cent give only the barest minimum, suggesting there are still a significant number of companies that may need to revisit their attitude to the principles of governance," Lowe says.

Companies claiming full compliance with the Combined Code (%)

Incidences of "boiler plating", where companies merely repeat the same statement each year rather than reflect on changed circumstances, appeared less prevalent in 2007 but there is still some way to go.

"In 2006 we found that only 32 per cent of companies who provided explanations of non-compliance had made any significant changes to those from 2005," says Lowe.

"On the face of it, 2007 has seen an improvement with 42 per cent making some change to their 2006 explanations. On closer inspection, however, we consider only about half of these updates to be no more than superficial."

Corporate responsibility

CR provides one of the highlights from the 2007 analysis. Investor pressure and wider stakeholder interests are beginning to channel corporate responsibility reporting into the mainstream.

Ninety-four per cent of companies include a reference in their annual reports and 84 per cent claim to have dedicated structures and processes in place for monitoring activity. Only 17 companies do not mention CR in their reports.

"Furthermore, we have noted a growing trend by companies to provide separate detailed CR Reports, led by 40 of the FTSE 100," says Lowe.

He adds that there has also been a huge increase in companies seeking to support their claims by reference to some form of external assurance. This figure has escalated to 42 per cent compared with just 8 per cent in 2006.

Lowe says that many more companies have taken stock that a company's CR reputation can be as important as the bottom line.

“Reputations take years to build and a few bad headlines to destroy. For example, if you have millions invested into a global garment manufacturer you want assurances that the company is not about to become front page news for running sweatshops somewhere in the Far East," he adds.

Business review

Grant Thornton’s 2007 Review found that the elements of the business review were commonly spread across the various sections of the annual reports rather than consolidated in one section.

Despite this, it would seem that the majority of companies are falling in line with the Business Review requirements of the 2006 Companies Act, in particular with regard to disclosure of principal risks.

Lowe explains that such disclosures would historically have been deemed to be a competitive disadvantage. In 2007, however, these concerns seem to have faded with almost 91 per cent of companies now disclosing principal risks, up from 56 per cent in 2006.

"This coupled with a greater disclosure of key performance indicators, albeit driven by the Companies Act and encouraged by the Association of British Insurers' guidelines on responsible investment disclosure, perhaps suggests this battle has now been won," Lowe adds.

Non-Executive Directors - The Higgs Effect

Another encouraging factor from the 2007 research is seeing the recommendations of the Higgs Review coming through in the areas of board composition, attendance and clarity around roles.

"This is being led by the FTSE 100 where 90 per cent now achieve the required balance for non-executive directors on the board, compared to 80 per cent in 2006," Lowe says.

In respect of the sensitive area of the assessment of the performance of the chairman by non-executive directors led by the senior independent director, the FTSE 100 has also continued to make advancements.

Eighty-four per cent now confirm they have met without the chairman at least annually to appraise performance. In the Mid 250 this trend has, however, lost a little momentum.

The average number of directors on boards at all levels has also continued to decrease. In 2007 the average was 9.4, down from 10 in 2006.

This masks a greater change in board composition where, excluding the chairman, the average number of executive directors fell from 4.6 to 3.8 and the number of non-executives rose from 4.4 to 4.6.

This trend is most evident within the FTSE 100 where the average number of executive directors has fallen from 5 to 4.2, compared with the average number of non-executive directors which has risen from 5.7 to 6.1.

The trend suggests a gradual move towards the separation of oversight and accountability from operational management as tends to be the case in the US. Whether this trend will continue remains a topic for debate, according to Grant Thornton.

Audit Committees

The introduction of International Financial Reporting Standards (IFRS) in pursuit of the transparency agenda, may be a victim of the law of unintended consequences.

This year's Review shows that just over 20 per cent of FTSE 350 audit committees, including just over 10 per cent of the FTSE 100, still do not identify an individual as having recent and relevant financial experience, or even invoke the default option of claiming collective experience.

"Anecdotal evidence suggests this area is a regular topic of conversation among directors concerned that they, and in particular audit committees, are having to place increasing reliance on financial directors and auditors to explain the IFRS accounts and to obtain appropriate assurance," Lowe says.

Auditor choice

For the first time this year, the review looked at auditor selection and found that just 17 per cent of companies disclosed the rationale supporting auditor appointment or reappointment.

"We found no changes in auditor appointments among the FTSE 100 during the period of review and only 4 per cent of the Mid 250 had changed," Lowe says.

The Review saw an overall drop in the number of companies claiming full compliance in the first few years following the revisions of the Combined Code in 2003.

Since then there has been a gradual improvement, although it looks likely to be at least of couple of years before 2002 levels - when disclosure requirements were less demanding - are restored.

"Despite slow progress there is still some positive movement in both the level of compliance and the level of the explanation, however, which suggests that the UK model is not out of date just yet," says Lowe.

He adds that the challenge is now firmly in the hands of the UK's leading companies and their investors to step up a gear or face either the consequences of greater prescription or possibly a widened scope for the Financial Reporting Review Panel with the inevitable public exposure for those who are found wanting.

Related articles

• Overseas issuers face tougher IPO rules
• Tough year ahead for financial reporting
• Boards fail to measure their own effectiveness
• Transfer pricing poses risk to multinationals
• Annual reports longer and more uniform
• Bland reports mean missed chances
• Half-year reports likely to get longer
• Watchdog finds accounts lacking

Related links

• Grant Thornton