A manifesto for UK leadership on corporate governance

By Carum Basra

boardroom, chair, chairman, board, ftse 100

In October, MPs and peers voted in favour of an early general election in the UK, bringing to an end a Parliamentary session defined by Brexit but also characterised by the neglect of important business policy reforms.

The nature of the UK’s departure from the EU will undoubtedly dominate much of the debate in the weeks running up to the vote. However, the end of a Parliamentary session should also enable policymakers to pause and take a wider view on what legal and policy framework ought to look like over the coming years and well into the future.

One area that has requires more studied consideration from lawmakers is corporate governance. Historically, this issue tends to feature very sparingly in the manifestos of most political parties. However, both Labour and the Liberal Democrats have issued extensive policy documents outlining how they would reform the system by which companies are directed and controlled.

While Labour’s proposals were undoubtedly the more sweeping—including mandating for boards to comprise a third of workers—both parties seemed to advocate a notable shift toward a European, stakeholder-oriented approach. Meanwhile, though the Conservative Party fought shy of specific recommendations, they too stated they wish to “strengthen” the UK’s corporate governance system. In fact, the question of how companies are overseen has become central to the debate, also cutting across other key issues, such as the size and remit of the state.

With the corporate governance debate galvanised, and high-profile corporate collapses still eating away at public trust, the Institute of Directors (IoD) has issued its own Corporate Governance Manifesto to inform the discussion and help restore wider confidence in business.

Our ten specific policy recommendations are designed to achieve three broad objectives: firstly, to increase the accountability of our corporate governance system to wider society; secondly, to improve the competence and professionalism of UK board members; and thirdly, to enhance the ability of board members to pursue long-term, sustainable business behaviour.

A commitment to high standards

The vast majority of business leaders take their responsibilities seriously; however, the wider public often feels that directors lack accountability. This is not a straightforward problem to fix, but we believe that the business community needs to take measures to demonstrate its commitment to high behavioural standards. The IoD is therefore proposing that the government should support the introduction of an industry-led Code of Conduct applying to board members of our largest companies.

It appears to be something of a historical anomaly that though doctors, lawyers and accountants are all bound by professional codes of conduct, directors are not.

Failings, perceived and real, on the part of the auditing sector have provided a specific source of public concern, and the industry should be subject to a statutory regulatory body with strong investigative and enforcement powers. We therefore support the establishment of the Audit, Reporting and Governance Authority as called for by Sir John Kingman in 2018.

Although doctors, lawyers and accountants are all bound by professional codes of conduct, directors are not

However, while supporting Sir John’s recommendations on the oversight of auditors, we feel that that having corporate governance and investor stewardship regulated within the same body as statutory audit is a far from ideal approach. We therefore suggest the establishment of a new Corporate Governance Commission that would be able to focus on stewardship and corporate governance working closely with industry.

Coupled with our desire to see the introduction of an industry-led Code of Conduct for our biggest firms, we would also like to see the government mandate minimum training requirements for directors appointed to boards of such entities. In the UK almost anyone over the age of 16 can become the director of a corporate entity. While that may be the marker of a free economy it is clear that the directorship of a significant entity is a major social responsibility, and a minimum level of governance knowledge could help ensure all board members take that responsibility to heart.

Additionally, externally led board evaluations have become an increasingly important aspect of how boards seek to assess their own competence. Up until now, such evaluations have been subject to limited scrutiny and there is little consistency between them. We therefore believe that the government should push forward with the introduction of a voluntary Code of Practice for the providers of board evaluation.

Defining a business purpose

The support among two major parties for a less shareholder-centric governance model is in part reflective of a wider shift in the business community itself, which seeks to put purpose alongside profit as a firm’s overriding mission. To build upon this development, government could encourage companies to adopt clearly defined ‘business purpose’ clauses in their annual reports.

Similarly, with the view that public sector outsourcers often exist under a different market environment to other businesses, we’ve suggested that the government explore opportunities to define a new corporate form—the Public Service Corporation. This form could allow those providing outsourced government services to adopt an approach that balanced the interests and obligations relating to its various stakeholders, including its shareholders, employees, pensioners, creditors and public sector clients. In doing so, we believe the Public Service Corporation could offer a way in which to address concerns about how public money is spent on private sector contracts.

The government should explore opportunities to establish a UK sovereign wealth fund to invest in the green and sustainable companies of the future

Of course, climate change—perhaps the defining issue of our times—has been a key driver of the ‘shareholder-versus-stakeholder’ debate, and we believe that corporate governance can be leveraged to help deliver the government’s green objectives. The government should explore opportunities to establish a UK sovereign wealth fund to invest in the green and sustainable companies of the future and in doing so embed the highest standards of corporate governance across the economy. The government should also support the implementation on an appropriate reporting framework for climate-related financial disclosures.

We believe that, if implemented, these recommendations would reinforce the UK’s pre-eminent position in the global corporate governance space and provide a model for the rest of the world to emulate. In any event, in order to deliver its agenda, the next government will have to work constructively with business to create an environment that enables directors to lead sustainable purposeful businesses which are both profitable and internationally competitive.

Carum Singh Basra is corporate governance policy adviser at the Institute of Directors.

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Board moves: Lookers signs tech non-exec Heather Jackson

By Gavin Hinks

parked cars, Lookers, Heather Jackson

Digital expertise: Heather Jackson

Heather Jackson, currently a non-executive at JD Sports, has joined the board of Lookers, the motor dealer struggling with a troubled market for cars.

Jackson, a former global chief information officer at HBOS, joins as a non-executive. Her portfolio also includes non-executive roles at Skipton Building Society and Ikano Bank.

Lookers sells new and used cars online and will be looking to Jackson for digital experience.

Lookers has hit difficulties in recent months. At the beginning of November it issued a profits warning saying full-year underlying profits would be around £20m instead of the forecast £38m. It also announced the departure of chief executive Andy Bruce and chief operating officer Nigel McMinn. Chair Phil White became executive chair, while non-executive Richard Walker stepped up to a part-time executive role.

A statement said: “As reported in the Group’s interim results statement trading during the six months ended 30 June 2019 was challenging.

“This was driven by ongoing weakness in consumer confidence in the light of political and economic uncertainty, pressure on used car margins and retail cost inflation.”

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Board moves: Tristel appoints Bruno Holthof as chair

By Gavin Hinks

Tristel medical hygiene products

New chair: Bruno Holthof

Tristel, a manufacturer of infection control and hygiene products, has appointed Dr Bruno Holthof as non-executive chair.

Holthof joined Tristel in February this year as a non-executive and will take over the chair role from Paul Barnes. An interim, Barnes stood in after the departure of Francisco Soler in December last year. Barnes will stay on as a non-executive.

Holthof is currently chief executive of Oxford University Hospitals. He has also served as CEO of the Antwerp Hospital Network, making it the most profitable hospital group in Belgium.

Tristel makes disinfectants and anti-infection products for use in hospitals, including animal treatment centres.

Turnover for the 12 months to June 2019 was up 18% to £26.2m

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British Academy issues principles to ‘put purpose at the heart of business’

By Gavin Hinks

business purpose, purpose and profits

Anglian Water this year changed its articles of association, or constitution, to recognise that its business purpose went beyond profits and benefits for shareholders to include long-term value for customers, communities and “positive outcomes” for the environment and society.

The move was the latest in a long line that places company purpose ahead of short-term gains. This week Oxford University professor Colin Mayer took the argument a step further, laying out a set of eight principles to aid companies in their journey to become “purposeful companies”.

Written on behalf of the British Academy, the UK’s national body for the humanities and social sciences, Principles for Purposeful Business sets out a conceptual framework to guide businesses and lawmakers toward policies and practices that should help corporates “profitably solve the problems of people and planet,” and prevent companies from doing harm.

This has been the topic of much discussion in recent weeks and months, though the issue has been a feature of governance debate since the financial crisis of 2008 reduced trust in business to historically low levels and challenged the legitimacy of capitalism. Mayer himself wrote in his 2012 book, Firm Commitment, that the corporation was “becoming a creature that threatens to consume us in its own avaricious ambitions”.

Among the principles (see full list below) company law should enshrine purpose “at the heart of the corporation”; company directors should practice “high duties of engagement, loyalty and care” toward public interests; shareholders should support corporate purpose in addition to their rights to a financial benefit; board structures should align managerial interests with purpose; performance should be measured based on “fulfilment of corporate purpose”; measures should examine the “impacts and investment” in workers, societies and natural assets.

According to Mayer some companies already recognise the fact that many corporates have failed to deliver benefits beyond their shareholders to the wider community and other stakeholders. Others have not.

“Restoring trust between businesses, stakeholders and society demands us to act differently,” said Mayer.

“The eight principles intend to enable corporations to act deliberately, boldly and profitably, to meet global goals and tackle problems of society, people and planet.

“A rethink of capitalism is possible, and here’s how it’s done.”

Need for change

Mayer is clearly on a mission. Indeed, at Oxford he leads the “future of the corporation programme”. But he is not alone in recognising the need for change. In August, leaders of some of the largest companies in the US—members of the Business Roundtable—pledged to “redefine corporate purpose”. This might have passed most people by but for the fact that Roundtable members include JP Morgan CEO Jamie Dimon and Amazon founder Jeff Bezos, causing the story to hit headlines around the world.

Dimon, chair of the Roundtable, even associated the topic of business purpose with the US’s central cultural value, the “American dream”, which he described as “alive and well, but fraying”.

Purpose has not been ignored in the UK either. Indeed, the topic is deeply embedded in the upcoming general election—at least in the manifestos of the Labour and Liberal Democrats.

Labour has proposed a rewrite of the 2006 Companies Act giving directors a duty to “promote the long-term interests of employees, customers, the environment and the wider public”. The corporate governance code will be amended to include disclosing evidence of tackling climate change and companies will be offered the opportunity to switch to a “dual board”.

The Liberal Democrats were more explicit about their interests in business purpose. The party said it would introduce reforms to ensure large companies publish a “formal statement of corporate purpose”. This would include “considerations such as employee welfare, environmental standards, community benefit and ethical practice, alongside benefit to shareholders”. The Lib Dems also want companies to report on their “wider impact” on “society and the environment”.

The Conservatives provide scant detail on their aims for governance other than to strengthen it through reforms to the insolvency regime and the regulation of the audit market.

Companies in the UK are already under some pressure to confront the issue of purpose. The refreshed corporate governance code published last year includes Principle B: “The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.”

However, there is no reference to “do no harm” as a duty and the code remains soft law compared to duties written into primary legislation. The Companies Act 2006, which currently details directors’ fiduciary duties, only mentions purpose obliquely.

A cultural challenge

Mayer’s report received a warm welcome in some circles. According to Luke Hildyard, director at the High Pay Centre, Mayer “accurately” describes the UK’s “extreme form of capitalism”. What worries him is whether UK companies can adjust.

“While just 2% of people feel that the UK economy is on the right track,” he says, “changing the culture of the business and finance establishment will be hugely challenging.”

He highlighted research with the TUC that shows returns to shareholders have grown six times faster than wages for the median worker over the past years. This he sees as evidence that corporates are still acting to satisfy shor-term demands.

“Businesses remain under immense pressure to deliver bigger profits and higher dividends with decisions governed by reporting cycles and share price movements while the consequences for the workforce, the environment and wider society is an afterthought by comparison.”

Elsewhere, Anglian Water’s approach chimes with proposals from the Institute of Directors (IoD), which last week issued its own governance manifesto. One of the IoD’s recommendations was for companies to write “business purpose clauses” into their constitutions, a proposal that echoes Lib Dem thinking.

According to Carum Singh Basra, corporate governance policy adviser at the IoD, directors should be leading “purposeful businesses” that are profitable and competitive.

“In line with this desire and consistent with the British Academy’s findings, we have called on government to encourage companies to adopt clearly defined business purpose clauses, either in their constitutional framework, or elsewhere in their annual report,” he said.

Prof Mayer and the British Academy have given fresh legs to the campaign for business to be purpose-driven with a significantly different approach to capitalism. It’s unclear how a new Conservative government might react. But boards will need to give it serious thought if Labour and the Lib Dems hold power after the election.

Purpose principles

1. Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them.
2. Regulation should expect particularly high duties of engagement, loyalty and care on the part of directors of companies to public interests where they perform important public functions.
3. Ownership should recognise obligations of shareholders and engage them in supporting corporate purposes as well as in their rights to derive financial benefit.
4. Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture.
5. Measurement should recognise impacts and investment by companies in their workers, societies and natural assets both within and outside the firm.
6. Performance should be measured against fulfilment of corporate purposes and profits measured net of the costs of achieving them.
7. Corporate financing should be of a form and duration that allows companies to fund more engaged and long-term investment in their purposes.
8. Corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of corporate purposes.

From The British Academy’s Principles for Purposeful Business.

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MSCI goes public with ESG ratings for 2,800 companies

By Gavin Hinks

sustainability reporting, ESG, CSR

For many companies, today will represent a new era of public exposure on their environmental, social and governance (ESG) performance. MSCI, a provider of indexes around the world, is to make public the ESG ratings of 2,800 companies for the first time.

The companies form MSCI’s ACWI Index which rates companies on a AAA to CC scale. MSCI says the ratings use 1,000 data points across 37 “key” ESG issues that are reviewed weekly.

The move comes after a huge growth in ESG investing. Estimates put the total assets under management in ESG funds at around $20trn, or about one quarter of all professionally managed funds. Last month Willis Towers Watson reported that ESG funds had increased by 23% in 2018, bucking the general trend of declining assets under management. Last year Larry Fink, chief executive of BlackRock, the world’s largest fund manager, said the demand for ESG would “transform all investing”.

There isn’t a day that passes when an asset manager does not announce a new ESG fund of some kind, though the precise definition of ESG can be hazy.

According to Remy Briand, head of ESG at MSCI, investors increasingly view ESG factors as a “critical” elements in their portfolios. Going public with the data will boost company performance, he insists.

“We want to encourage open discussion among investors and companies on how to improve sustainability across the board and hope that making the MSCI ESG ratings available to all will facilitate these discussions,” Briand said.

Companies are under considerable pressure to improve their sustainability practices. But so too are asset managers and owners. Earlier this year the government required pension fund trustees to report on their ESG policies. Meanwhile, asset managers are viewed as having an essential role in pushing companies to improve, not just through investment decisions, but also through their stewardship activities.

Assertive action required

However, there are mixed results. In a blog post, Principles for Responsible Investment (PRI), a campaign group persuading asset managers to invest responsibly, worries that stewardship is not being used by some investors.

According to Paul Chandler, director of stewardship at PRI, there have been successes, but not enough.

“Unfortunately, these successes are the exception, not the rule. As we face growing systemic risks that cannot be diversified away—from trade wars to climate catastrophe—the willingness to act more assertively to safeguard long-term outcomes for beneficiaries is not keeping pace with the actions needed or being undertaken at the scale required,” Chandler wrote.

Investors have been “tentative”, he said, focused on short-term topics and individual holdings rather big picture issues. He also pointed to investors under-resourcing their stewardship activities.

PRI has now launched a programme to show how stewardship can been used to deliver changes across ESG factors. ESG funds themselves have become controversial, with research showing that some contain stocks that are heavily dependent on fossil fuel. Elsewhere, others have pointed out that many such stocks—energy companies, for example—involve heavy investment in renewables.

Formulating an ESG fund is an imperfect science: investors are still learning about the issues, though rule-makers, such as the European Union, have attempted to help by providing a taxonomy for sustainable finance. Going public with ESG ratings is all part of the growing pressure to act on climate and societal issues. As imperfect as the process is, the pressing nature of the climate crisis makes such action a valuable contribution.

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Conservatives focus on executive pay and audit reform

By Gavin Hinks

Tory manifesto, Labour manifesto, Lib Dem manifesto, general election

Executive pay will be in the crosshairs of a new Tory government, should Boris Johnson be elected as prime minister, according to the party’s manifesto published at the weekend.

However, despite flagging a hot button issue, the Tory manifesto was short on detail.

Indeed, governance is an add-on in the document to a much larger consideration of the UK tax system.

The Tories pledged to “reform” the audit regime and insolvency rules to offer more protection to customers and suppliers. They also promised to “carefully study” the ongoing investigation into the collapse of veteran travel company Thomas Cook. But the boldest commitment was on pay.

“We will improve incentives to attack the problems of excessive executive pay and rewards for failure,” the manifesto states.

The party also promised changes to protect pensions.

“We will reintroduce legislation that protects pension pots from being plundered by reckless bosses, helps savers be better informed with pension dashboards, and creates a new style of pension scheme which is more sustainable for workers and employers.”

The Tory manifesto statements stand in stark contrast to the Labour manifesto, which offered a detailed menu of controversial governance reforms.

Lib Dems: corporate purpose and due diligence

The three main parties in the 12 December general election have now published their manifestos revealing their thoughts on a range of policies, including corporate governance.

The Tory manifesto commitment to reform audit is a long-standing arrangement following three reviews of the audit profession triggered by the collapse of construction giant Carillion. The Kingman review looked at regulation; the Competition and Markets Authority examined the audit market; and the Brydon review, due to report by the end of the year, is looking at the content of audits.

The Liberal Democrat proposals, published at the end of last week, offered more discussion of governance reform. Indeed, in a slew of policies under the heading of “Better Business”, the Lib Dems discussed the current in vogue topic of “corporate purpose”.

The party said it would introduce reforms to ensure all companies publish a “statement of corporate purpose, including considerations such as employee welfare, environmental standards, community benefit and ethical practice.”

The Lib Dems also pledged to follow France and its Law of Vigilance, saying companies would face “a general duty of care” for the environment and human rights, including “due diligence” to avoid child labour and modern slavery, or products that involve deforestation, “in their operations and supply chains”. There has been much debate about the possibility of the EU introducing mandatory human rights due diligence for large corporates.

The Lib Dems would take current UK governance code provisions a step further and mandate a worker representative on boards and also on remuneration committees. A staff representative in the boardroom would have the “same legal duties and responsibilities as other directors,” the manifesto says. The current code gives companies a choice of three options: a worker director, a non-executive tasked with collecting worker opinion, or create an employee panel. Currently, most companies look to be opting for a designated non-executive.

The Lib Dems also pledged to “encourage” employers to give staff in listed companies a right to shares, and for companies to take up “new forms of incorporation”.

In its discussion of reforms for business, the manifesto worries that the system underpinning business “is not working as it should”.

“Business can be a force for good in our economy: we needs thriving businesses to create wealth and a model of responsible capitalism that generates good jobs, shares prosperity and see businesses promote rights and protect the environment,” the manifesto says.

Labour: board structure and pay ratios

A week ago Labour gave proposed business reform its own press conference separate from the manifesto event, signalling that the party sees the topic as a potential vote winner, perhaps more so than the Lib Dems and Conservatives.

The party offered reform of directors’ duties in the 2006 Companies Act, the opportunity for dual boards and a third of board seats going to employees. Supervisory boards, if they are used, would include employees, customers and long-term investors.

The party detailed an “excessive pay” levy based on a pay ratio limit of 20:1 for chief executive to lowest-paid employee.

The party said it would create a new state auditor for financial firms and introduce auditor rotation every five years, reducing the existing limit of ten years.

Shadow chancellor John McDonnell said: “This new architecture of corporate governance and regulation has the potential to lay the foundations of the successful dynamic economy we need, serving our whole community.”

However, the Institute of Directors (IoD), which last week launched its own manifesto for governance, described Labour’s proposals as a “jump to the most prescriptive and cumbersome end of the scale”.

The IoD detailed a list of ten priorities including a new “code of conduct” for directors, delivering reform of audit regulation, and the introduction of a new independent governance commission instead of having governance overseen by a regulator looking at other issues.

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Organisations are still falling short on staff mental health

By Kirsty-Anne Jasper

businessman using mindfulness to improve staff mental health

Conversations around mental health provisions are more common than ever before. We’re increasingly told that stigma surrounding illness is breaking down and everyone from company CEOs, celebrities and even royalty have gone on record to speak of their personal issues—something that would have been unthinkable even a decade ago. After the Stevenson/Farmer review in 2017 stressed the critical importance of helping employees at work, it seems that positive mental health is, at last, having something of a moment.

Yet when we at The Chartered Governance Institute, along with governance recruitment specialist The Core Partnership, commissioned a poll to look at how companies are supporting their staff’s mental health, it revealed that organisations were not doing as well as one may have hoped or expected.

“The reality of modern working is that there is less time to do a great deal more and this is increasing levels of stress”

—Peter Swabey, The Chartered Governance Institute

The survey coincided with World Mental Health Day and found that fewer than half (45%) of respondents to the poll believe that their organisation does enough to support staff’s mental health, with over a quarter (26%) stating that their organisation does not do enough. A poll a year ago gave similar figures of 49% and 31% respectively.

Simply speaking, organisations are still failing to provide enough support to staff in terms of their mental health. Peter Swabey, policy and research director at The Chartered Governance Institute, said of the findings:

“Lack of knowledge and stigma still appear to be big hurdles to overcome. It cannot be right that people are holding back from reporting mental health issues in this day and age for fear that this will be perceived as weakness and affect their chances of promotion, a pay rise or a bonus.

“Such toxicity is the sign of poor organisational culture and addressing the symptoms of lack of well-being in the workplace will not succeed unless the underlying causes are tackled too. The reality of modern working is that there is less time to do a great deal more and this is increasing levels of stress. A positive culture and better engagement can do wonders to help employees feel they are a valued member of the workforce.”

Barriers to improvement

This view is reflective of the poll’s wider findings, where 59% of respondents stated that a lack of knowledge around mental health issues prevented organisations from offering greater support to staff. Worryingly, over half of the respondents (51%) stated that stigma around mental health was a barrier to improved provisions.

According to one respondent: “There are lots of initiatives in place but unfortunately, the mental health issues relating to overwork and shortage of staff continues to be a problem with very little evidence of it being addressed.”

Over half of respondents stated that stigma around mental health was a barrier to improved provisions

There are other issues that need to be overcome as well. Perhaps surprisingly, cost was considered to be a barrier by just 11% of respondents, but concerns about policies being taken advantage of and lack of interest were each cited by 19% of respondents as being a barrier. Fear of abuse of policies is an oft-cited concern: even mental health campaigner Ruby Wax acknowledged the issue in an interview with The Chartered Governance Institute’s Governance and Compliance magazine, where she stated:

“You have to be careful, as you can get fired if you have too much time off for sickness. And you might be faking it, but there’s ways to look to see if people are abusing the system and lying about mental health issues. Somebody could be taking advantage too if they just want to go fishing, you know what I mean?”

Positive engagement

Despite the overall suggestion that organisations need to do more, it is important to note that there does appear to be a genuine desire on the part of businesses to better support their staff’s mental health. Those organisations taking steps to improve provision are employing varied methods, with respondents naming mindfulness; resilience training; mental health first aid training; yoga and meditation; massage; counselling; well-being sessions; People’s Wellbeing Champions; and occupational health support in person, by telephone and online as methods being deployed.

A total of 47% of respondents stated that their organisation had a mental health first aider; 66% said that they have a counselling service; 52% have a well-being policy; and 41% have specific management training on staff mental health. All of this must be seen as a positive step; however, the fact that there has been little movement within a year in terms of the perception of how much support is given is cause for concern.

It appears that there is momentum around the tangible need for mental health improvements, but tinkering around the edges has been the order of the day for too many organisations. Fundamental changes are needed in order to improve well-being, prevention and productivity.

Kirsty-Anne Jasper is deputy editor at The Chartered Governance Institute’s Governance and Compliance magazine.

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Board moves: Rightmove completes on new chair

By Gavin Hinks

Andrew Fisher

Rightmove, the online property portal, has appointed Andrew Fisher as its new non-executive chair.

Fisher takes the hot seat from Scott Forbes who retires at the end of December after 14 years chairing the company.

Fisher was previously chief executive and executive chair at Shazam, the music app, and currently chairs the remuneration committee at Marks & Spencer. He has also served as a non-executive at Merlin Entertainments, the amusement park operators.

Rightmove, with a market cap of around £5.4bn, made headlines in recent weeks after provoking the ire of estate agents over the fees it charges for advertising.

Half-year results published in July showed both revenues and profits up 10% on the same period last year. Revenues stood at £143.9m and profits at £108.2m.

However, the company conceded that estate agents, its main clients, had seen a drop in transactions during the period.

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US audit committees ‘could do better’ on disclosures

By Gavin Hinks

US audit

US audit committees have made great strides to improve transparency surrounding their work, though some areas remain stubbornly in the dark, according to a new study.

A report from the Center for Audit Quality into the S&P 500 reveals that while 84% disclose discussion of non-audit services, and 71% chew over the length of time an auditor has been engaged, they seem remarkably shy when it comes to more sensitive topics.

For example, no audit committees in the S&P 500 disclose discussions about having to address “significant areas” with their auditors. Only 4% (5% in 2018) disclose talks about the connection between the audit fee and audit quality. A measly 2% disclose deliberations about the way the audit committee considers auditor compensation, with no change from last year.

Other disclosures also seem to have stagnated. The number of committees disclosing that their audit partner rotates every five years has remained on 49% for two years running. The number involved in audit partner selection has shrunk from 52% to 50%.

Where does that leave the work of audit committees? With room for improvement, not least because there will be suspicions that if work is not disclosed then its hard to assume it is being done.

CAQ executive director Julie Bell Lindsay said: “We urge audit committees to consider the opportunities to enhance transparency.”

One place to improve is “significant areas”. The report said: “Increased disclosure in this area likely would be helpful to investors. As auditors are beginning disclosing critical audit matters… audit committees have an opportunity to provide their perspective on these matters—and others, if appropriate.”

Other elements that could be disclosed, said the report, are the criteria used to evaluate the work of an audit firm, and the audit committee’s participation in picking new audit partners.

Meanwhile, cybersecurity—a burning issue for big corporations switching to digital business models—is one of the areas that have seen improvements. Last year 14% of audit committees divulged whether their board had a cybersecurity expert. That now stands at 23%. And 34% of committees revealed they now hold responsibility for cybersecurity risk oversight, up from 19%, last year.

UK audit reforms

Audit committees have proved contentious in the UK as parliamentarians and independent reviews looked at reforming the regulation and functioning of the audit market following a number of high-profile business failures.

The Kingman review, published almost a year ago, proposed government give regulators the power to recommend the replacement of an audit committee chair if it finds that standards have fallen. The review also called for powers to order a review of the “effectiveness” of an audit committee.

Meanwhile, when the Competition and Markets authority looked at the audit market it called for regulatory powers to place an observer on the committee, or issuing a public reprimand.

The CMA’s report concluded: “Overall while some audit committees are effective in overseeing the activities of auditors, the evidence in section 3 suggests that there is significant variation in the performance of audit committees within the FTSE 350, and that selection and oversight of auditors is not sufficiently focused on quality.”

Parliamentarians were also convinced of the need for new measures affecting audit committees. A report published by the House of Commons business committee agreed with the CMA proposal.

It said: “It is deeply concerning that many audit committees do not appear to be factoring professional scepticism and challenge into their criteria for selecting auditors and are instead using ‘cultural fit’ as a desirable attribute.

“Equally worrying is the finding that many audit committees are spending so little time on auditing matters. This questions whether many audit committees are committed to challenging management and to putting in the necessary time to ensure that auditors are as well.”

So far, none of the recommendations have been implemented, though business secretary Andrea Leadsom has said reform of audit is a priority.

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