2018: A year in governance

By Gavin Hinks

Senior officials at the Financial Reporting Council (FRC) may believe Scrooge has stepped off the pages of A Christmas Carol. In his recent oh-so-close-to-festivities report, Sir John Kingman said, “Bah, humbug!” to the UK’s governance watchdog and recommended the regulator for financial reporting, audit and actuaries be shut down.

It must be said however, Sir John was being less like Charles Dickens’ most famous miser, and more like a rational soul calling time on an institution that has long since lost its lustre with many close observers of corporate governance.

But the demise of the FRC is just one in many significant events that marked 2018 as a big year for governance: yet another corporate failure triggered the end of the FRC; audit quality and the audit market was placed under the microscope and found wanting; the UK got a new governance code designed for “long-term” value; executive pay continued to be a national debate; the murder of Saudi Arabian journalist Jamal Khashoggi indicated CEOs could be agents for change; and the a major report highlighted the role companies and investors have to play in speeding up the battle against climate change.

The year’s events left no room for complacency and mean non-executives have had little time to settle. And to add to it all they’ve had to ensure they are cyber literate and prepared for Brexit, whatever the final outcome of negotiations might be.

End of the FRC

Though the year closes with uncertainty over Brexit, there are now no unknowns about the future of the FRC. The body is destined to be wound up and replaced by a new organisation: The Audit, Reporting and Governance Authority. The move comes on the recommendation of the Kingman review appointed earlier in the year by government to look at whether the FRC was still relevant.

The review said it had done a good job on governance but in other areas was found wanting. It noted the FRC stood accused of moving too slowly, being too close to the organisations it regulates and being “too timid”. Things had to change.

Reforms are on the way elsewhere too after the Competion and Markets Authority (CMA) issued its own report on the audit market. Here the CMA advised audit and non audit services of the big firms be split into separating operating units to minimuse conflicts of interest. It also wants closer scrutiny of the audit committees and their auditor appointments.

Both sets of reforms stem directly from the collapse at the end of last year of Construction giant Carillion. A major contractor to government, the company’s collapse led to Parlimentary enquiries that ended in intense criticism of both the FRC and Carillion’s auditor KPMG.

Indeed the FRC has an unfinished inquiry probing the Carillion audit, though a report from MPs accused the firm of failing to exercise professional scepticism towards company’s accounting judgements. KPMG’s public image took a further beating a routine check prompted the regulator to conclude that audit quality at the firm had fallen.

Meanwhile the FRC also made headlines for producing a brand new governance code for the UK. There was criticism for failing to insist on companies including employees on their boards, but there was also praise for the way it integrated sustainability.

Indeed, in principleit places society at the heart of boardroom thinking. It’s opening principles now insist: “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”

Germany too got in on the act, launching its own new code. The code there, however, chiefly attacked the issue of executive pay, granting boards permission to introduce majore claw-back provisions on the pay of failing execs. Dr Rolf Nonnenmacher, chairman of Germany’s Governance Commission, said: “With the present draft we are providing a strong, modern, clearly worded, compact and relevant code for discussion, which reflects the status quo of international corporate governance discussion.”

Pay and behaviour

Debate over executive pay in the UK did not let up through the year and will, perhaps, intensify in 2019. Investors have issued warnings and threats. There were small measures in the governance code but otherwise concern remains broadly where it was.

Of course, the UK’s current bout of soul searching over remuneration results largely from the huge £100m bonus received by Jeff Fairburn, chief executive of housebuilder Persimmon.

The ensuing public outcry prompted the resignation of the company and remuneration committee chairs in December last year. Fairburn even agreed a reduced bonus. But the sheer scale of the payout remained an obstacle. The end for Fairburn came in November when he walked away from a BBC interview when asked about his pay. Footage went viral on the internet and soon after Fairburn was asked to turn is his shovel for the sake of the company.

Other individuals caused waves with their own behaviour, or their alleged behaviour. After much public concern about the succession of Sir Martin Sorrell at WPP, the CEO stepped down in April amid a board investigation into allegations about his personal conduct.

He was not alone in having behaviour questioned. Elon Musk, CEO of Tesla, was forced to give up the company chairmanship after regulators in the US investigated a tweet he sent claiming to have a buyer to take Tesla private. Musk caused further concern when he appeared on a YouTube show apparently smoking cannabis. Shareholders were not best pleased, though newspapers had a field day.

Elsewhere Ted Baker founder Ray Kelvin demonstrated the power of the #MeToo movement and made the news when it emerged that employees had jointly signed a letter complaining about his habit of “hugging” colleagues and workers. Kelvin was eventually compelled to take a leave of absence.


Facebook, Uber, Google+ and British Airways saw some of the biggest cybersecurity breaches of the year, proving once again that customer data is not as safe as we might like to think. The issue is now well and truly on the boardroom agenda with company leaders everywhere dreading the midnight call that announces criminals have breached fire walls to steal customer data.

The issue is perhaps best exemplified by new measures from regulators which in July saw the Bank of England demand explanations from financial firms on how they plan for a cyber attack.

The issue is unlikely to go away any time soon. Investors are concerned. Writing for Board Agenda, Fiona Reynolds of UN Principles for Responsible Investment, says: “Boards need to work closely with senior management to escalate the message across the organisation that security is everyone’s problem.

“Keeping data secure is not about buying the latest security software; it is about everyone in the company taking responsibility for keeping data secure, whether it’s deleting emails with attachments from unknown sources to protecting the data on laptops that employees take home with them.”

Though IT issues do not end there. The resigning in September of TSB bank’s chief executive Paul Pester over an IT meltdown in the Spring underlined the accountable leaders have for tech, even if they are not experts.


In the age of the internet, artificial intelligence and robotics, cyber security is now an ever- present boardroom concern. Climate change is a global concern and also very much a feature of boardroom discussion; or should be. The issue has resulted in much speculation about the role of companies in battling global warming and how they integrate “sustainability”.

When the Intergovernmental Panel on Climate Change (IPCC) issued its report in October it included dire warnings about the need to accelerate climate change policies at government and company level. But there were concerns.

The report focused on limiting the rise in global temperatures to 1.5°C above pre-industrial levels, but said: “Meeting this challenge would require a rapid escalation in the current scale and pace of change, particularly in the coming decades.”

It added a warning. In a passage about the ability of business to invest in the right technologies, the report said persuading businesses to invest properly is a problem if their main concern remains pleasing shareholders.

It explained that a lack of clarity about the position of regulatory regimes and the quality of low emission innovations, as well as uncertainty over future revenues because of the price of fossil fuels, amount to an obstacle.

“This inhibits low-emission investments by corporations functioning under a ‘shareholder value business regime’”, the report says.

Board Agenda has conducted its own research, in association with Mazars and INSEAD, to reveal how boards have integrated sustainability thinking into their discussions and policies. The good news is that company leaders recognise its importance. The bad news is that they appear less convinced about the information and policies they require to tackle the issue.


Perhaps the most horrifying event this year to touch on governance concerns was the murder of Jamal Khashoggi.

Chief executives of many global companies believed they should take action with dozens withdrawing from an investment conference in Riyadh, the so-called “Davos in the Desert”.

Indeed the boycott appeared to underline the growing phenomenon of “CEO activists”, especially in the area of human rights.

Ana Zbona, a project leader with the Business and Human Rights Resource Centre, told Board Agenda: “There has been growing recognition on behalf of business to see that they have a role to play in speaking out.”

And that was only a fraction of governance developments in 2018. Next year promises equally busy. Have a restful Christmas.


The year placed governance on the front of newspapers and at the heart of major debates. If anything, however, it reemphasised the importance of companies in tackling societal issues whether it be human rights, data privacy, climate change or scoial inequality. Any board member in denial about that would be well adivised to seek alternative employment.

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A healthy balance for parent banks

By Guest Contributor

A wide range of post-crisis regulatory reforms has created a more complex governance framework for banks when it comes to managing their local subsidiaries.

In the past decade, regulators have implemented measures at both a global and local level, aimed at protecting depositors and taxpayers, and ensuring local subsidiaries are adequately capitalised to avoid contagion in the event of another banking crisis.

As a result, banks now have home and host country regulation to contend with. For example in the UK, the Financial Conduct Authority has forced lenders to separate their retail operations by erecting a ring-fenced institution with its own board and management team.

Meanwhile, in the US, Europe’s systemically important banks have been forced to create intermediate holding companies—independently capitalised subsidiaries that are subject to rigorous stress tests from their local regulator, the US Federal Reserve.

While regulation has become more local, big banks continue to operate as global entities as they serve the increasingly international needs of all their clients. It is still down to the group board to ensure they have effective oversight and risk management to ensure their far-flung subsidiaries have the right level of local expertise while continuing to manage capital, resources and products on a global basis.


With the general direction of travel by regulators towards increasing levels of subsidiary independence, this has inevitably led to the proliferation of subsidiary boards and management structures that in some cases rival their parent companies for heft and complexity. Taken to its logical conclusion, this could hamper the ability of the parent to exercise effective control over the activities and strategic direction of their own subsidiaries.

On the other hand, holding too much control at central group level can create a one-size-fits-all approach without taking into account the unique specificities of each subsidiary, and create a culture of complacency where the board of a subsidiary does not take sufficient responsibility for its own actions.

Given these often competing developments—more local regulation on the one hand, and more globally connected banks on the other—there is an inherent tension between the home jurisdiction of the parent and the host jurisdiction where its subsidiaries are located.

“Home regulators typically want banking groups to be able to exercise more parent control over subsidiaries while host regulators typically want to deal with sufficiently independent subsidiaries, able to constructively challenge decisions that may be in the interest of the wider group but not necessarily of the specific subsidiary,” says Cliff Ekwem, a senior analyst at governance advisory firm Nestor Advisors.

Therefore, banks face a complicated and costly mixture of global and legal entity management and controls that consume significant board and senior management time as they figure out the best structure and composition for the boards of their subsidiaries.

According to the Basel Committee banks must have a group governance policy with clearly defined responsibilities at both a parent company and subsidiary level. Meanwhile, the European Banking Authority, the regulator for the region’s lenders, established guidelines for internal governance in 2011 that require boards of a banking subsidiary to adhere to the “same internal governance values and policies as its parent company.”

The board must ensure that risk systems are robust and uniform, and have clear oversight of issues such as auditing, technology, selection, culture, whistleblowing and fraud. Despite the stricter regulatory environment and clear guidelines, serious breaches and lapses still occur. The uncovering of money laundering and fraud this year at Danske Bank’s Estonia branch highlighted how much work needs to be done at board level to ensure oversight of compliance of bank subsidiaries in different countries.

Downstream governance

From the outset, parent companies must rely on extensive control mechanisms to ensure that the group has an effective subsidiary governance programme in place to assure itself that all companies within the group have the same values, ethics, controls and processes in place as at the parent board level, known as “downstream governance”.

Downstream governance is assured through the subsidiary board, whose task it is to enable, complement and lead. At the same time, the local board should act in an independent and objective manner from the parent board and focus on safeguarding the corporate interests of the subsidiary.

“The composition of subsidiary boards should reflect an adequate balance of promoting downstream guidance and acting independently from the parent. Finding the right board composition for each subsidiary will depend on its intended function and strategic importance,” says Lisa Andersson, head of research at Aktis, a leading provider of bank governance data.

Research by Aktis (Fig. 1)on Europe’s 14 biggest banks, as defined by the Financial Stability Board as globally systemically important (G-SIBs), revealed that subsidiary boards typically comprise six key profiles: subsidiary non-executive directors, subsidiary executives, parent/other subsidiary executives, joint company non-executive directors, joint company executives and employee representations.

Fig 1.

According to Aktis, the largest proportion of directors are classified as subsidiary NEDs, who are typically seen to bring the independent viewpoint needed to differentiate the parent board from the subsidiary board. The second biggest group of directors were NEDs, who held executive positions elsewhere in the group (P/O subs exec). As these directors serve as executives elsewhere in the group, they will typically be seen to provide “downstream governance” to the subsidiary board.

Subsidiary executives, who typically oversee the day-to-day operations of the subsidiary, represent 14% of directors. Finally, the presence of joint NEDs and execs who serve on both the subsidiary board and the parent/management board may indicate a subsidiary of strategic importance to the group.


Analysis of subsidiary chairs by Aktis revealed that almost half are subsidiary NEDs, while more than a third are executives of the parent or other subsidiaries. When it comes to the independence of the chair, there is a big discrepancy between the subsidiary, where 22% were considered independent, and the parent, where almost two-thirds were considered to be independent.

“The data indicates that parent companies opt for a chair with some connection to the parent entity, which is not unusual given the parent company is typically the ultimate owner of the subsidiary,” says Andersson.

This theme plays out across individual board members. According to Aktis (Fig.2), 68% of directors on parent boards are classified as independent, compared with only 29% at the subsidiary level, well below the traditional 50% minimum independence threshold sought in many jurisdictions.

There is no real general best practice when it comes to the composition of subsidiary boards but the most important element is finding the right balance between parent control and subsidiary independence. “For example,” says Ekwem, “group executives and group non-executive directors bring more parent control; subsidiary executives typically bring a more local perspective and intimate understanding of subsidiary operations; group outsiders such as subsidiary-level independent directors usually bring an external, out-of-the-box perspective, which may also be targeted to the specific country in which the subsidiary operates.”

Then there is the added complication that not all bank subsidiaries are created equally and banks give greater priority to some over others. For higher priority subsidiaries parents may endeavour to put similar governance practices in place as the parent company, with outside directors, scheduled board meetings, formal committees and even annual board evaluations.

For these subsidiaries, the parent company may want to have common directors on both the parent and subsidiary board or have joint meetings between the parent and subsidiary board/committees to ensure a clear line of sight and accountability between both entities.

Fig 2.

By contrast for lower priority subsidiaries it may be the case that their boards are made up entirely of insiders, with no formal committees.
The higher priority the subsidiary, the more material it is likely to be to the parent in the event of a breach of risk management or other controls.


In seeking to understand what defines a high or low-priority bank subsidiary, Aktis defined it using two indicators—consolidated versus unconsolidated total assets; and the size of subsidiaries’ assets relative to group assets.

Depending on how assets are distributed, banks are categorised as “concentrated” where they have more than 55% of their assets in the parent entity; “balanced” when they have between 25% to 55%; or “dispersed” where less than 20% of assets are held within the parent company. The more dispersed the asset classification, the higher priority the subsidiaries are.

According to the Aktis, half of European G-SIBs fell into this category, requiring more executives on the ground to manage the day-to-day operations of the company. “The data showed that companies defined as being dispersed have the highest proportionality of subsidiary executives, joint NEDs and joint executives,” says Andersson. By contrast, centralised structures place less emphasis on the subsidiary, and the composition of the board is drawn from an internal pool of candidates where independence is not necessarily important.

Fig 3.

But as the Danske scandal illustrated, “low priority” can also equate to “high risk” from a compliance and control perspective. In a report published in September 2018, Danske Bank admitted that the Estonian control functions did not have a “satisfactory degree of independence from the Estonian organisation” and that the branch operated “too independently from the rest of the Group with its own culture and systems, without adequate control and management focus from the Group.”

Since the scandal, Danske says it has strengthened governance and oversight with the introduction of a new pan-Baltic management. It has also improved its systems and instigated firm-wide anti-money laundering training. But, perhaps more importantly, it has implemented risk management and compliance in performance agreements of all members of the executive board and senior managers.

Creating local board structures at subsidiary level is not necessarily the only tool that group boards have at their disposal. Group boards can ensure that the group management team develops strong functional lines with a real group-wide remit, particularly for key control functions such as internal audit, risk and compliance.

Nestor’s Ekwem says: “This way, the control functions can act as the eyes and ears of the parent, guide the development of group-wide control processes/policies and ensure that the most important, risky, compliance-sensitive issues are brought to the attention of the group board via the group audit committees and risk committees.”

According to Aktis, audit and risk committees (Fig. 3) are the most important in relation to banking subsidiaries. Seventy-six percent of banks surveyed had both an audit and risk committee at subsidiary level, while 66% had a remuneration committee at local level and 51% had no nomination committee.

A possible explanation for this is that the appointment and recruitment process would be handled by the parent company rather than the subsidiary. The research revealed a high concentration of subsidiary NEDs on the audit and risk committees, reflecting the need for independence on these committees.


With so many conflicting priorities and in some cases divergence between host and home regulation, the solution recommended by Aktis is to introduce a group governance policy (GGP). But GGPs are not always formalised, and very little exists in the way of formal documentation. According to Aktis, Spain’s Banco Santander is the only big European bank that discloses a GGP to the general public.

Banks must spend time reflecting on the equation of how to balance parent control and subsidiary independence, and ensuring that their agreed solution is clearly documented in a policy, or set of group policies, that all internal stakeholders understand.

Ekwem concludes: “Several ‘best practice’ banks have actually reflected on and developed their own solutions for these matters in recent years; many, however, appear not to have written down this agreed solution in a clear group governance policy.”

This article was produced in association with Aktis and Nestor Advisors, which are supporters of Board Agenda.

Aktis, Nestor Advisors

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Audit committees braced for new relationship with regulators

By Kevin Reed

City of London

It’s been a huge week for audit and governance. Two reports, by the Competition and Markets Authority (CMA) and Sir John Kingman, have set a path towards reconstituting the provision and regulation of audit to improve its quality and value.

For board members, and particularly audit committees, who help choose and work with auditors, there is much to consider – and particularly the direction laid out by the CMA.

Among the wide-ranging recommendations of the interim report, it suggests audit committees could need to spend more time on auditor scrutiny; that investors need to accept smaller firms as auditors if audit committees choose them; and other executives should have less influence on the audit process.

And the one that could cause the most consternation: audit committees should report directly to a regulator during the tender and engagement processes; and regulators should rebuke audit committees if they believe their performance is below par.

“There is no doubt that the changes put more heat on the audit committee chair, and for some that will make the role less attractive,” says Pippa Begg, co-chief executive at Board Intelligence.

“One thing is for sure, it does shift the prominence of the role and the risk vs reward pendulum. I would expect to see audit committee chairs doing far more due diligence, and rightly so, before they accept a position.”

Being on an audit committee is “a thankless task” according to Paul Moxey, visiting professor in corporate governance at London South Bank University and a consultant.

He has concerns that the proposed changes might fail to address the core issue: audit committees have “little incentive” to go looking for audit problems.

“Similarly, thorough investigation of what audit committees did, or did not do, after a failure such as Carillion–should focus audit committee members’ minds,” he adds.

“It is a great pity that this has not be done [before], as there is a lot which could have been learned that could have made audit committee members more effective,” says Moxey.

However, portfolio non-executive director and CFO mentor Bob Beveridge doesn’t agree with a number of the measures laid out for audit committees from the CMA report.

Firstly, he disagrees with regulatory involvement and reporting during the audit tender process. A “minimum criteria” should be set out for the process, and gauged in terms of its appropriateness and effectiveness in review.

“The proposed change … [implies] a lack of trust in audit chairs and feels rather disrespectful. Reporting afterwards is less of an issue and perfectly reasonable,” he explains.

But, for Pippa Begg, “fundamentally the role hasn’t changed”.

“Audit committee chairs should have been doing this before–we’ve just raised the bar on what is expected and injected new ideas (like two auditors undertaking the audit) to ensure quality,” she says.

“Non-executives have always had to walk a fine line of being a critical friend to the executive, and these proposals heighten that challenge.

“The key to being successful will be how they challenge habits, norms and conventions, and ask the difficult and sometimes quite uncomfortable questions in a way that supports the business rather than making those involved feel hen-pecked.”

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Survey reveals that boards are grappling with sustainability

By Gavin Hinks

sustainability, climate change

Board members are confident that they understand the importance of addressing sustainability, but a new survey also reveals that leadership teams are still grappling with how to build the right policies and information to ensure they are meeting the challenge head-on.

A survey conducted by Board Agenda found that 73% of European businesses either strongly agree, or agree, that ignoring sustainability would affect their company’s ability to create long-term value (Fig. 4), a clear signal that the issue is high on the agendas of many boardrooms.

More than half (58%), of the 234 respondents also said their boards had a clear understanding of the risks and opportunities embodied in sustainability (Fig. 6). More than half again (53%) said they see a clear business case for sustainability, while 57% say they aim to meet their sustainability obligations.

The news will be encouraging to those who have campaigned to place sustainability at the heart of business. Earlier this year a new UK Corporate Governance Code placed sustainability central to board responsibilities, with Provision 1 of the code asking leadership teams to disclose in annual reports “the sustainability of the company’s business model”.

The code also says: “Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity.”

Elsewhere, the Intergovernmental Panel on Climate Change has laid bare the challenge facing businesses and their ability to adapt to global warming, saying that “few” were currently prepared if the world is to limit warming to no more than 1.5° above pre-industrial levels. But while the survey, conducted in conjunction with professional services firm Mazars and business school INSEAD, gives rise to some optimism about the corporate world’s ability to integrate sustainability into the management of their companies, there are signs that the tools to do it may not yet be fully evolved.

While the risks and opportunities appear to be understood, half could not say that their sustainability intentions were delivered by effective business policies. A quarter of respondents could only partially agree that their policies served sustainability, while a worrying 15% indicated that their policies may not be up to the mark (Fig. 10).

Sustainability knowledge in boardrooms appears to be good, with more than two-thirds (69%) saying they had a “good understanding” or “enough” people with the right kind of knowledge (Fig. 9). An alarming 12% said they struggle to see how sustainability fits into their strategies.

And while there is recognition that sustainability will affect the long-term prospects of business, only one-third of respondents could say the topic had been integrated into performance measures and compensation schemes for executive board members. Half emphatically said it had not.

This is fascinating when considered against figures that reveal that sustainability opportunities and risk are explicitly considered in key business activities such as innovation and product development (70%), acquisitions (44%) and fixed asset investment (39%) (Fig. 7).

Anthony Carey, head of board practice at Mazars, said the results of the survey were “both positive and paradoxical”. “The intentions are good with three out of five (59%) aiming to be a market leader on sustainability, or among the best performers, but only one in five (22%) have a committee or non-executive with dedicated responsibility for the area, and only a third (33%) agree that sustainability measures are integral to determining the performance and compensation of executive directors. Moving in the right direction but with a way to go.”

Craig Smith, professor of ethics and social responsibility at INSEAD, said: “It is encouraging to see in the survey findings widespread recognition of the importance of business attention to sustainability and of the significant risks to businesses that fail to give it sufficient attention, which makes sustainability a critical board issue.

“At the same time, we don’t see much evidence that boards have the people, the information and the mechanisms in place to be able to demand the actions deemed necessary.”

The survey results drew various opinions from business commentators, as follows:

“The report’s conclusions are consistent with ICGN’s own view that sustainability factors are an important driver of both opportunities and risks, and that an awareness of relevant sustainability issues is increasingly essential for overall board effectiveness. It is positive to see sustainability is clearly on the agenda for many boards, but the study also suggests there remains scope for improvement in the corporate sector. ”
George S. Dallas, policy director, International Corporate Governance Network

“Businesses which ignore sustainability are not likely to be sustainable themselves. It is good to see this lesson is slowly sinking in with boards.”
Peter Montagnon, associate director, Institute of Business Ethics

“This report highlights the inconsistency of business responses to sustainability today. Facing huge but often longer-term challenges, boards struggle to articulate a strategic narrative between the reality of today’s business plan and a future reality shaped by the risks and opportunities of a low-carbon transition. Many suffer from a real dissonance in their strategy, where they can see the need for significant—even transformative—change at some future point, but simply tinker around the edges of business-as-usual in response to the commercial pressures of today.”
Tom Delay, chief executive, Carbon Trust

“We welcome the findings of the report of Leadership in Corporate Sustainability—European Report 2018. While as expressed in the report many companies agree that a long-term vision is necessary to ensure the sustainability of their activities, most of them already incorporate environmental, social and governance factors in their strategies and reporting and some already have specific climate-related policies in place. However, some companies are also reporting non-financial information for the first time, in line with the new requirements introduced by the Non-Financial Reporting Directive. Therefore, we believe that flexibility is key to avoid ‘one-size-fits-all’ rules and ensure that companies at different stages of growth have the possibility to adapt. Companies need regulatory consistency and stability…”
Florence Bindelle, secretary general, EuropeanIssuers

“The days are gone when being aware of sustainability issues was enough. Today boards of directors must translate awareness into actions, use sustainability as a competitive advantage and reflect on the wider purpose of their business.”
Suzanne Liljegren, communications committee chairman, ecoDa


Anthony Carey, head of board practice in the UK, Mazars

“The results of the survey are positive and insightful. They demonstrate that boards have sustainability front and centre in their minds as a key strategic consideration, and they recognise that it has a very significant impact on their companies’ ability to create long-term value.

“It seems equally clear, however, that more work is needed by boards to make sure that they have the infrastructure in place within their businesses and in the boardroom to drive reliable and useful non-financial reporting, and to manage their long-term sustainable performance effectively. It is very encouraging that almost 30% of boards are aiming to be market leaders in sustainability, with a further 30% seeking to be seen as strong performers.

“Similarly, while recognising it is a self-assessment, about 60% of respondents consider their boards to have a clear understanding of the risks and opportunities related to sustainability in their company’s strategy. Yet only 50% of respondents have a firm conviction that they have the right information and measures in place to help them understand their companies’ position, ambition and progress on sustainability.

“Moreover, in terms of how boards maintain sustainability oversight, only 17% said their boards had a dedicated sustainability committee, with just 5% having a dedicated non-executive director fulfilling this function. Likewise, only 35% fully agreed that sustainability expertise or a sustainability mindset are explicit selection criteria in the appointment of either executive or non-executive board members. A similarly low proportion, 33%, agreed that sustainability measures are an integral part of the performance measures and compensation of executive board members. It is also surprising that boards do not see pressure from investors and employees as key drivers for their sustainability activity.

“This does not accord with millennials’ focus on the issue when choosing favoured employers and may suggest that a worrying generational divide is emerging between boards and their key stakeholders in many instances. A gap seems to exist between the extent to which boards recognise that sustainability is a critical business issue, and their effectiveness in measuring and managing it. To close this gap, many boards need to address how they can enhance boardroom expertise in—and focus on—sustainability issues as a matter of priority. By doing so, they will greatly strengthen the likely long-term value of their businesses and reduce the risks of unexpected shocks.”


Prof. N. Craig Smith, chaired professor of ethics and social responsibility, INSEAD, and Ron Soonieus, managing partner, Camunico, and executive-in-residence, INSEAD

“This research into leadership in corporate sustainability clearly shows that the subject is rising up the business agenda. Driven by a developing societal awareness, companies face growing demands, if not pressures, to conduct their business sustainably. These come from stakeholders such as consumers, investors, national governments and NGOs, and have been articulated in international documents and agreements, of which the UN Sustainable Development Goals have gained particular prominence.

“But to keep up with these ever-increasing demands, it is not enough for boards to just be aware of and express a commitment to sustainability. What was good enough yesterday is no longer sufficient today. For example, a company being eco-efficient and socially responsible in its own operations is no longer doing enough. Often firms must address the sustainability of their supply chains as well.

“Sustainability is increasingly associated with basic questions of company purpose, core product offerings, business models and innovation, and what value creation means to the organisation. These considerations demand the attention, drive, and decision-making of the board. Simply put, if an issue is not on the board’s agenda, it is unlikely to be at the heart of an organisation’s strategy, culture or governance.

“A lack of board attention to sustainability is short-sighted, if only as a matter of good governance, not least with institutional investors also looking at sustainability policies in a more holistic way. The findings of this research must inevitably be judged with regard to the representativeness of the participants and the potential for social desirability bias in their responses.

“That said, it is surely encouraging to find strong evidence within this sample of substantial board awareness of the importance of sustainability. Yet the research also shows that boards still struggle to get the right information, expertise and processes in place to address sustainability issues effectively. For instance, only around a third of participants agreed that a sustainability mindset was an explicit selection criterion in appointing board members and senior executives, and only a third reported that sustainability was an integral part of the performance measures and compensation of executive board members.

“The urgency and means of addressing these issues will vary. There are, however, some actions that any board could take right away, including: scheduling time for fundamental discussion about corporate purpose and what value means to your organisation; acquiring in-depth information on sustainability performance for your board; looking for sustainability expertise and mindset when appointing new board members; and explicitly integrating sustainability into board committees and board member duties.”

Download the full report, Leadership in Corporate Sustainability—European Report 2018.

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Being prepared: The rise in internal investigations

By Guest Contributor

A complaint about your company or staff is never a comfortable experience. But in banking and financial services it could spark an internal investigation that can prove gruelling and expensive to undertake.

If it does happen, leadership teams should know what to expect. This will help ensure they are prepared and able to conduct a robust process.
Being aware of what investigations entail is important. Inquiries have the potential to absorb the time of senior managers and staff, involve deep trawls through company databases and run up considerable cost. But in many cases the complaints cannot be ignored and investigations must be thorough.

In a trend echoed across European markets, internal investigations in financial services are on the rise. In the wake of 2008’s financial crisis and numerous other scandals that followed, regulators in most jurisdictions have become more demanding, with high expectations that companies will investigate when credible complaints emerge.

Corporates are not obliged to investigate every complaint; some will be vexatious or spurious. Others, however small, will be legitimate and should be pursued. Firms must also have an eye on the regulator’s opinion should serious trouble emerge later.

There are other pressures. In the wake of VW’s Dieselgate scandal, Luxleaks and the Panama Papers, the EU has beefed up whistleblowing protections in recognition that insiders can provide valuable information to public authorities. The reforms have, however, also placed more responsibility on corporates to respond to whistleblowing allegations with their own prompt inquiries.

Corporates are not obliged to investigate every complaint; some will be vexatious or spurious. Others, however small, will be legitimate and should be pursued.

That doesn’t mean that all companies manage their responsibilities in the same way. Some reinforce their internal legal teams with the aim of tackling investigations with in-house staff.

Others, however, rely on the work of external advisers to ensure their conclusions have integrity.

The investigations themselves may differ in detail, depending on the type of complaint, their scale and the services involved; but there are common features that leadership teams should be aware of that will help in managing the process.

According to Lynn Dunne, partner in the dispute resolution practice at law firm Ashurst, there is a raft of issues to consider when undertaking an internal inquiry including its scope, the number of people involved, the documents needed for examination and the drafting of a final report. Hanging over everything is the expense.

Dunne says there is always a tension between the need to resolve a complaint promptly and the cost of the investigation. And that, she says, places a premium on scoping before a probe gets underway.

“Investigations can be costly and that is why we undertake a thorough scoping exercise at the beginning,” says Dunne. “Scoping requires difficult strategic decisions to be taken by the internal legal team and that can involve a lot of detailed discussion and advice from advisers.”

Elements involved in the scoping include defining the allegation; the timeframe; who will supervise internally and which functions will be involved; identifying people for interview, whether they are available and their locations. One recent investigation involved interviews with individuals in both London and Singapore.

Then there is the critical issue of a document search and just how many inboxes and document storage sites may need to be reviewed. And whether a full-scale search, involving a specialist document review team, can be avoided.

If a general search goes ahead, the quantity of documents involved could be vast. Given that most are digital, a high degree of attention is given to keywords used to sift databases. This can be tricky and involve difficult decisions because a badly chosen keyword could mean overlooking a “smoking gun”.

“Watch out for the unexpected, prepare for unforeseen findings and ensure you have the most trusted people involved”

–Lynn Dunne, Ashurst

Dunne cites the example of one investigation that involved 460,000 documents after keywords were applied. That necessitated a further review of keywords before the documents could be passed to a review team. In another example, emails of an employee identified as the friend of a wrongdoer became embroiled in the inquiry. That meant searching 160,000 messages and led to the discovery of a vital document.

The scale of a document trawl and the resources required can make them costly, though Dunne advises that the search fees can be capped. But this is by no means the only costly element. Lawyers taking and compiling detailed interview notes, as well as the report drafting itself, can also come at a hefty price.

Again, Dunne says there is room for manoeuvre. A firm commissioning an investigation should consider what kind of report they require. Some will need a highly detailed report that can be passed to a regulator. This will require considerable drafting and much senior “thinking time” from legal advisers.

In other instances the report could be reduced to an oral presentation with a summary of actions. That could help keep costs lower and shorten the process.

The financial crisis and more recent scandals have ensured there remains an intense spotlight on accountability among financial services firms. That is unlikely to change any time soon. That means the trend for internal investigations will continue.

Dunne warns: “Watch out for the unexpected, prepare for unforeseen findings and ensure you have the best and most trusted people involved. Prepare to make difficult decisions.”


While many countries in Europe have seen an increasing number of internal investigations, there are local differences. Germany has seen an expansion in the number of inquiries but after Dieselgate at VW the investigatory landscape has developed its own particular features.

“It is very important to establish the right strategy for an internal investigation from the very start.”

–Nicolas Nohlen, Ashurst, Frankfurt.

According to Nicolas Nohlen, a dispute resolution partner with Ashurst in Frankfurt, Germany has seen an uptick in the number and scope of investigations. This has been driven by two main factors: laws and case law requiring a proactive approach by corporates plus a more demonstrative set of public authorities effectively outsourcing the investigation of potential wrongdoings to internal inquiries.

The role of public authorities has become clear in German investigations. Nicolas Nohlen says: “It is very important to establish the right strategy for an internal investigation from the very start. This includes defining the scope and goal of the intended investigation. It further includes discussing the approach to cooperation with public authorities.”

In recent years, German corporations have followed different approaches to cooperation. Some corporations have comprehensively passed the results of their internal inquiries to the authorities. Others have acted much more restrictively, basically denying any access for the authorities to data and documents pertaining to an ongoing internal investigation. The latter strategy can backfire. In several instances, the German authorities raided the offices of uncooperative corporations.

In the Dieselgate case, the authorities even searched the Munich offices of the law firm retained by VW for purposes of conducting the relevant investigation. The German Constitutional Court held in June 2018 that attorney-client privilege considerations did not prohibit German authorities from conducting such a search.


When it comes to Spanish internal investigations, there is a similar picture: inquiries are on the rise. But, according to Manuel Lopez, head of Ashurst’s financial regulatory practice in Madrid, the increase is far behind activity in the UK and Germany.

“The key issue is often assessing and limiting the risk.”

–Manuel Lopez, Ashurst, Madrid.

The key trigger for Spanish investigations is action from government agencies, rather than a proactive approach by companies.

Spain has also seen few investigations as a result of whistleblower legislation. New whistleblowing protocols were put in place by the CNMV, the Spanish financial regulator, two years ago but has yet to produce a single disclosure.

“We are a culture where sounding this type of alert is not very popular,” says Lopez. “Internal investigations driven by whistleblowing is therefore not very common.”

Because internal inquiries mostly result from government action they also tend to start when there is a risk of sanction against a company, says Lopez. That influences the goals of an investigation and plays a key role in scoping, which can involve asking whether the complaint is isolated or whether the internal investigation should assess the risk of the problem being more widespread.

“The key issue is often assessing and limiting the risk,” says Lopez. “The risks are sanctions, in the case of criminal activity, reputational risk and economic risk (if there is a class action). These factors will determine the shape of the investigation.”

This article has been prepared in collaboration with Ashurst, a supporter of Board Agenda.

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Tax transparency: compliance burden or reputation booster?

By Guest Contributor

The past few years have seen plenty of progress towards greater transparency over the tax positions of the world’s giant corporations. The public perception that global companies weren’t paying their “fair” share of tax in the countries where they made huge sales was mirrored in the corridors of power. Now major initiatives—such as the Base Erosion and Profit Shifting (BEPS) Action Plan, adopted by the Organisation for Economic Co-operation and Development (OECD) and G20 countries in 2013—are bearing fruit.


The BEPS Action Plan recognised the need to enhance transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other international tax avoidance risks. This led to the introduction of country-by-country (CbC) reporting, whereby multinationals are required to provide financial information by tax jurisdiction, including data on revenues, profit before tax, corporation tax paid, tax accrued, tangible fixed assets and employees.

““The requirement is spreading. It’s only going to become more prevalent across the world as people expect greater transparency in the way that tax is reported.”

–Catherine Hall, Mazars

The UK was one of the first countries to formally commit to introducing CbC reporting, with regulations introduced in 2016 and subsequently updated. Large multinationals and partnerships must comply.

The UK is not alone. According to the OECD, as of November 2018, 47 jurisdictions had already introduced a CbC reporting obligation for fiscal years starting in 2016. More countries are in the process of introducing such reporting.

Jurisdictions also plan to share the CbC information they collect: more than 1,900 bilateral exchange relationships have been activated, with the first automatic exchanges of CbC reports taking place in June 2018. By sharing information, the tax authorities hope to be able to assess international tax avoidance risks more effectively. Companies are under no obligation to make their CbC information public, although a few, such as Vodafone, do so.


CbC is just one aspect of tax transparency. For example, the UK now requires large British groups, companies and partnerships to publish their tax strategy; they cover areas such as how businesses manage tax risks, their attitudes to tax planning and the level of risk that they are prepared to accept for UK taxation. The strategy must be published on the internet so that a member of the public could find it easily.

“South Africa has also recently introduced legislation around the reporting of tax policy,” says Catherine Hall, international tax partner at Mazars. “The requirement is spreading. It’s only going to become more prevalent across the world as people expect greater transparency in the way that tax is reported.”

Public demand and purchasing power could also drive greater transparency by more organisations. “People are more open now to making moral judgements when they purchase,” says Dr Renáta Ardous, Mazars’ UK head of the China Desk and international tax and transfer pricing director. “This has been the case with human rights. Tax is also now part of this moral landscape.”

No business can expect to escape the reach of tax transparency. Hall says: “All businesses are affected—or will be in time. Tax transparency’s initial focus has been on the largest multinational corporations, but the legislative thresholds will reduce. We’ve seen that with other regulatory requirements.”

She continues: “The largest corporates provide the easiest wins, but the expectation is that the requirements will move down to the next tier. Meanwhile, we have Making Tax Digital coming from the bottom up. There’s a similar premise, but just a slightly different format.”
The scope of transactions targeted by tax transparency has also increased. “Cross-border transactions were the starting point—the flows of revenues from high tax jurisdictions to low tax jurisdictions,” Hall adds.

“Today the scope is more general. It’s looking at transactions with your suppliers and your customers, not just within the group.”

Be prepared and proactive

Because tax transparency is here to stay, boards need to have it on their agenda and under discussion. “They shouldn’t think of it as a ‘tick box’ exercise, but should engage with their finance teams, their internal and external tax advisers and their supply chain, to make sure they really understand where value is added and what’s happening in their business,” Hall says.

“Boards need to be able to answer questions about tax. They need to be able to sit down in front of the tax inspector from any jurisdiction and explain how the business operates and in a consistent way for each jurisdiction.”

Boards should also make the most of the willingness of policymakers to hear their views on tax issues. “Governments and international organisations are listening,” Ardous adds. “Boards now have a platform to make their voice heard.”

“People are more open now to making moral judgements when they purchase. This has been the case with human rights. Tax is also now part of this moral landscape.”

–Dr Renáta Ardous, Mazars

She refers to a recent workshop held by OECD representatives in China with the Chinese tax authority, to which large US and European companies with a strong Asia presence were invited. “The OECD wanted to understand how the new transfer pricing rules were going down,” Ardous says. “They wanted live feedback. There is now high demand to hear the voice of business—and that’s certainly something new in Asia.”

Similarly, the OECD is planning to conduct a peer review of CbC in 2020 that will consider three core issues: how jurisdictions have introduced CbC requirements; whether the current CbC template is the best it can be; and whether any tax authorities have misinterpreted or misused CbC data.

Ardous is encouraged by this comprehensive review, particularly the willingness to consider business concerns around how tax authorities use CbC information.

“Businesses would like some safeguards that their data is not being misused,” she says.

Boards can also look for ways to turn tax transparency to their organisation’s advantage by reporting on the tax contribution they make to society. “Some organisations have gone down the path of reporting on their total tax paid,” Hall says. “That helps people understand the contribution companies make. It’s about the total contribution to society, which isn’t just about the headline effective tax rate, because many things affect that.”

Some companies are “smart” about transparency, especially those that engage with government, Ardous says. “They can use the publication of their tax strategy to build their reputation as good corporate citizens.

“Being transparent can serve your own purpose—by showing that you are a strong, confident business.”

This article has been produced by Board Agenda in collaboration with Mazars, a supporter of Board Agenda.

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