How well companies are run has been a headline-grabber of late, from the banana republic that is FIFA to Tesco’s board and auditors apparently failing to spot its profits had been inflated. But defining and ranking ‘corporate governance’, a phrase that tends to make eyes glaze over, is still an elusive business.
The Institute of Directors and Cass Business School have made a brave start at quantifying it, via a survey and a positively exhausting list of no fewer than 53 ‘instrumental factors’ ranging from the number of women on a board to executive pay.
The best-run FTSE 100 companies were testing group Intertek, outsourcers Bunzl and engineering company Weir Group, according to the survey of 400 members of the IoD, the Association of Chartered Certified Accountants and the Chartered Institute for Securities and Investment. Bottom of the pile were G4S, Sports Direct, RBS and Tesco.
But when ranked by the IoD’s criteria, Unilever, Marks & Spencer and BG Group were top (despite criticism of the latter's new chief exec’s enormous pay package, just before it was bought by Shell). Bunzl was still in the top 20, but Weir and Intertek were demoted to mid-table. G4S, RBS and Tesco were all higher than their survey ranking. Only Sports Direct still languished in the relegation zone, in second-to-last place in both.
Both approaches have their drawbacks, though. The survey was self-selecting and the sample size very small – the IoD alone has 38,000 members. Meanwhile, the IoD and Cass admitted themselves their analysis included several ‘arbitrary decisions’, including weighting six governance areas equally.
What, to take just one example, is the exact impact of a number years a company has had their current auditor? Too many and the risk is the auditors getting too cosy with senior management, too few and they may not be able to properly examine a complicated company. The researchers do acknowledge the drawbacks and this is apparently only the start in creating a ‘robust index that does not encourage box ticking’.
It will definitely be interesting to see what the IoD and Cass come up with next, then. But their work so far also raises the question of how much corporate governance actually matters. Sports Direct, for example, has its problems: founder Mike Ashley still owns 55% of shares and is ‘executive deputy chairman’, giving him de facto control of his retail empire.
The company is undeniably successful. In its most recent half year (to October 26) sales rose 6.5% while profits jumped almost 10%. In the last five years, shares have boomed more than 520%. But they’ve slipped around 13% in the last year (the suspicious investor might note today they’re around 666p).
Perhaps not coincidentally, shareholders have been getting more restive. Activist investor Crispin Odey criticised the retailer in March for not having a finance director. It’s only just appointed an ‘acting’ one, after leaving the position empty for 18 months.
Like many things, corporate governance probably ought to matter more in the good times, but usually only gets attention when the going gets tough.