Contents

by Andrew Riley

Andrew Riley qualified as a chartered accountant and has spent 15 years working in benefit communications and investment risk management for consultancies such as Talking People, PwC and Ernst & Young.  He is the 2008 President of the London Chapter of the International Association of business Communicators.

Corporate Governance means more to the communicator than reputation management. When effective corporate governance promotes thriving organisations, market confidence and public trust. Internal communicators have a duty to be aware of the corporate governance responsibilities of their organisation, and to support it and enhance it. But internal communicators lack the language of 21st business to start the conversation with directors - a knowledge of key corporate governance terms and principles solves this.

A Deloitte study of 800 North American companies published last year found that well-planned and well-executed corporate governance brought about significant business benefits such as: enhanced market confidence and reputation management, reduced risk of loss through fraud, improved acquisition integration, better control over management and information systems, standardisation of processes and controls as well as improved disclosures for stakeholders.

Internal communicators have a significant contribution to make to help an organisation achieve its corporate governance objectives and manage its risks effectively and efficiently, because internal communicators understand an organisation's culture and the different types of person working for that organisation, and know how to change personal and group attitudes and behaviour to obtain successful outcomes.

This chapter:  

(1) provides an overview of corporate governance using the ground-breaking 1992 UK Cadbury Code as a practical tool to ground corporate governance concepts,

(2) highlights a number of key corporate governance responsibilities placed on directors which internal communicators can contribute; and

(3) proposes some interventions and improvements an internal communicator can make to directors. 

What corporate governance means: an overview

'Governance' can be defined as control or direction by a body with authority. 'Corporate governance is the system by which companies are directed and controlled' (Cadbury Report 1992). The corporate governance structure sets out who amongst board directors, managers, employees, investors and other stakeholders are responsible for making corporate decisions. Company procedures and controls are put into practice to ensure that the company objectives are fulfilled. Investors often take the view that good practice in corporate governance increases the long-term value of a company by encouraging risk taking to win rewards whilst protecting the company's assets and reputation.

There is a distinction to make between governance and management. Often the internal communicators' work is on whether management operations are running, with a focus on governance internal communicators get to know what their board of directors need to do to demonstrate that business is being run properly and being seen to run properly.

A corporate governance framework: the responsibilities placed on directors

Broad international guidelines on corporate governance are found in the OECD Principles of Corporate Governance and the US led internal control framework of the Committee of Sponsoring Organisations (COSO). A brief read through these and a copy left on the workdesk gives internal communicators credibility and an opportunity to ask directors' more about what are their key needs and wants. Much of the direction of corporate governance and an acceptance of its broad remit to a far reaching range of stakeholders has evolved from the workings of the UK Cadbury Committee on the Financial Aspects of Corporate Governance set up in 1991 in the UK and by the USA COSO committee set up in 1985 to tackle fraudulent financial reporting. Internal communicators should note how much the corporate governance mindset has moved from being concerned with financial transactions to all aspects of company policies, procedures and actions in the wider community.

Internal communicators should be aware that corporate governance operates on balance of power principles and puts in balance checks and balances to observe the respective rights and concerns of investors, directors and other interest groups. Key parties which  to consider are: the board of directors, managers, employees, equity shareholders, suppliers, customers and the general public.

An overview corporate governance evaluator for internal communicators to assess their own companies would be:

• who has the power within companies to make decisions?
• in whose interests those powers are exercised and the decision taken?
• whether those powers are properly exercised?
• what are the rights of the various stakeholder groups?
• how those rights can be, or should be, protected?

The directors of the company are entrusted with the most power but under their corporate governance duties, directors need to demonstrate that the decisions they make are in the interests of the company shareholders, employees and other stakeholders and not in their own interests.

Corporate governance and the use of information

Company directors have the most access to information systems of their company and it is entrusted to directors that they should be the most knowledgeable about what is happening in the company. There is also the understanding that some of this information is not for other parties to know about, and the directors are required to make the judgement about what information to hold back and what should be released to whom.

However, certain corporate governance regulations set out what information directors must make publically available and what non-public monitoring requirements they must fulfill. Directors are given the responsibility of monitoring company performance - and therefore it is expected that they have set up the correct information flows and risk management reporting frameworks to carry this out. For instance in the UK the Cadbury Report 1992 Code of Best Practice stated: 'We recommend that boards pay particular attention to their duty to present a balanced and understandable assessment of their company's position. Balance requires that setbacks should be dealt with as well as successes, while the need for the report to be readily understood emphasises that words are as important as figures.' (Part II Financial Reports 4.50).

But Corporate governance has developed beyond a fair presentation of information - it requires that the risks and rewards of the business are properly monitored and assessed. The Cadbury Report has been assimilated into a UK Combined Code and the most recent version published 2006 states requires 'the Board, should, at least annually, conduct a review of the effectiveness of the group's system of internal controls and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems. (Combined Code C 2.1).

Corporate governance requirements do not stop at how financial information is obtained but extends into each aspect of the company's business and the attainment of its risk and reward strategy.

Interventions and improvements an internal communicator can make

The internal communicators' corporate governance checklist

A useful source of information for the internal communicator to check out what the corporate governance requirements are for a director is the the UK Corporate Governance Combined Code 2006. Available at the Financial Reporting Council ( www.frc.org.uk/corporate/combinedcode.cfm ) the Combined Code describes the governance principles under the headings A. Directors, B. Remuneration, C. Accountability and Audit, D. Relations with shareholders, and E. Institutional Shareholders.

Principles of best practice of most interest to the internal communicator are:

A. DIRECTORS

A.1 The Board

MAIN PRINCIPLE: Every company should be headed by an effective board, which is collectively responsible for the success of the company.

Supporting Principles (extract): The board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company's strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performances. The board should set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met.'

Five code provisions are given relating to board meetings and identification in the company annual report of what the board consists of and how the board makes decisions and which decisions are delegated to management.

Recommendations for Internal Communicators interventions and improvements for the Board

• Put together an internal communication business plan that shows how the internal communication resources help the company meet its strategic aims and measures the better achievement of these aims through better management performance
• Perform a communication audit assessing how well known and accepted are the company's values and standards
• Assess the recent company annual report for achievement of Combined Code disclosure requirement, clarity of language, ease of layout and accessibility

A.5 Information and professional development

MAIN PRINCIPLE: The board should be supplied in a timely manner with information in a formand of a quality appropriate to enable it to discharge its duties. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

Supporting Principles (extract): The chairman is responsible for ensuring that directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary...Under the direction of the chairman, the company's secretary's responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development as required. The company secretary should be responsible for advising the board through the chairman on all governance matters.

Three code provisions are given relating to how each director should be given access and advice necessary in order for them to fulfill their corporate governance obligations. 

Recommendations for Internal Communicators interventions and improvements for Board information and professional development

• Working with the Company Secretary and directors, perform a communication audit assessing how information flows and sources given to the directors and recommend areas for improvement

A.6 Performance evaluation

MAIN PRINCIPLE: The board should undertake a formal and rigourous annual evaluation of its own performance and that of its committees and individual directors.

Supporting Principle (extract): Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role.

One code provision is given stating that the annual report should desribe how the performance evaluation has been conducted.

Recommendations for Internal Communicators interventions and improvements for performance evaluation

• Working with the Company Secretary, create and conduct a survey with one-to-one interviews to evaluate individual contributions

C. ACCOUNTABILITY AND AUDIT

C.2 Internal control

MAIN PRINCIPLE: The board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets.

One code provision is given stating that the board should conduct, at least once a year, a review of the effectiveness of the group's system of internal controls and should report it to shareholders, and that the review should cover all material controls, including financial, operational and compliance controls and risk management systems.

Recommendations for Internal Communicators interventions and improvements re internal control

• Working with Head of Internal Audit and Financial Director to assess how well employees understand the risks, controls and procedures of the work they are doing
• Working with Head of Internal Audit and Financial Director to conduct employee workshops to explain company culture and reporting guidelines in relation to risk-taking and rule-breaking
• Working with Head of Internal Audit and Financial Director to produce an attractive, well-explained internal controls report that makes employees proud of what they do, and markets the company effectively

D. RELATIONS WITH SHAREHOLDERS

D.1 Dialogue with institutional shareholders

MAIN PRINCIPLE: There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

Supporting Principles (extract): The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient.

Two code provisions set out how the chairman should ensure that the views of shareholders are communicated to the board as a whole and meetings held by the chairman, non-executive directors and relevant directors with shareholders; and how the board should set out in their annual report the communication activity by board members with shareholders.

Recommendations for Internal Communicators interventions and improvements re dialogue with shareholders

• Working with company external communicators and media relations agencies to ensure messages and responses are communicated internally and feedback
• Review of social media sites to assess what is being said externally by employees to a global audience

D.2 Constructive use of the AGM

MAIN PRINCIPLE: The board should use the AGM to communicate with investors and to encourage their participation

Four code provisions are given relating to the arrangements to propose resolutions, count votes and ask questions.

Recomendations for Internal Communicators interventions and improvements re constructive use of the AGM

• Review for investors of employee and suppliers feedback to managers and board of directors to use as examples in AGM regarding what is working and what is not working

E. INSTITUTIONAL SHAREHOLDERS

E.2 Evaluation of governance disclosures

MAIN PRINCIPLE: When evaluating companies' governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention

Supporting Principles (extract): Institutional companies should carefully consider explanations given for departures from this code of corporate governance and enter into a dialogue with the company if they do not accept the comany's position, and bear in mind the size and complexity of the company and the nature of the risks and challenges it faces.

Recommendations for Internal Communicators interventions and improvements re evaluation of corporate governance disclosures

• Where relevant to internal communicator's responsibilities, working with Company Secretary to gain an understanding of what aspects of corporate governance institutional shareholders are suggesting improvements so that these can be embedded in the company. 

Schedule C of the Combined Code gives a summary of what is required as best practice in a company annual report. Internal communicators can use this a checklist of some of the key areas of company activity that need to be described in a company annual report, and show directors, the Company Secretary and Head of Internal Audit that they are up to speed with what occupies so much of board management time.  It can be downloaded at www.frc.org.uk/corporate/combinedcode.cfm

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