Carillion Plc: A Governance Case Study from the UK
Courtesy of Joseph A. Smith Jr.
At year-end 2016, Carillion Plc (Carillion or the company) was, in the words of its annual report, “one of the UK’s leading integrated support services companies, with a substantial portfolio of Public Private Partnership projects, extensive construction capabilities and a sector-leading ability to deliver sustainable solutions.”  The company had projects ongoing in the UK, Canada and the Middle East with revenues of £5.2 billion, net assets of £729 million and a market capitalization of just over £2 billion.  In 2017, the company ran into substantial difficulties and ultimately failed. This note will review public reports by and about Carillion from a variety of sources to try to understand the reasons for the company’s decline and fall and what Carillion’s directors could have done differently to prevent such an outcome. Although the failure of Carillion occurred under the governance structures of UK law, regulation and custom, it highlights many issues that are relevant to US directors and senior executives as well.
Carillion became an independent public company in 1999, when Tarmac Group demerged into a building materials company (Tarmac) and a company focused on support services and construction services (Carillion).  The two activities had previously been conducted under the same corporate structure and it was thought that separating the two would make the profitability of each operation more transparent and increase the focus and value of each of the demerged companies. 
From the point of view of the building materials business, which continued to operate as Tarmac, the spin-off addressed a concern that it was subsidizing the construction business.  Given the fact that publicly-held building materials companies at the time of the spin-off traded at a higher multiple of earnings (12X) than did construction companies (7X), it was thought that the spin-off would enhance the value of Tarmac.  In addition, the spin-off made it easier for Tarmac to deal with construction companies than before, as it was no longer a competitor as well as a supplier. 
The spin-off was also intended to give Carillion what one spokesman called “a clearly defined separate identity” and to emphasize its strengths and potential in activities beyond construction management.  In fact, the company’s new name was “a corruption of the word carillon which means a peal of bells, seeking apparently to emphasize this new clarity.”  The spin-off and change of name was also meant to “distance” the company from a perceived exclusive focus on the construction business and to emphasize “its service sector strengths, particularly its Private Finance Initiative projects.”  As the company said at the time of the spin-off, “Carillion has a big involvement in facilities management, in PFI and in rail maintenance. It’s not just a construction business anymore”. 
Carillion did not have an easy birth. The shareholder meeting at which the spin-off was considered had considerable controversy over alleged breaches of acceptable corporate governance practices. A number of institutional shareholders of Tarmac protested the inclusion of the approval of the “demerger” with increases of executive compensation in one resolution rather than in two separate resolutions.  The proposed compensation packages included £1.37 million in cash and pension adjustments for Sir Neville Simms, Chairman of Tarmac, who became chairman of Carillion. 
There were also protests relating to the transfer of the pension rights of some Tarmac employees and retirees from the well-funded Tarmac pension plan to an allegedly comparable Carillion plan without consultation with, or disclosure to, such employees and retirees.  At the meeting of shareholders voting on the spin-off, Sam Pickstock, a former Tarmac director and representatives of company pension recipients charged that Tarmac was “stealing pensioners’ peace of mind” by taking them out of a well-funded plan.  Referring to the spin-off, Mr. Pickstock went on to say, ”It will be the pensioners, their widows and dependents wo will pay the price …Every penny piece that will be legally creamed off will be used to top up profits and executive perks.” 
Despite the uproar, Tarmac and Carillion managements prevailed and the spin-off was approved, although with the supporting vote of only 53% of outstanding shares.  Carillion started its separate corporate existence with no debt (Tarmac retained all of the combined predecessor’s corporate debt), 14,000 employees, turnover of £1.8 billion and an estimated market capitalization of £200 million.  It also started operations without a CEO or finance director. 
Having obtained its independence, Carillion grew quickly in both size and scope, in substantial part through acquisitions.  The most significant of these acquisitions were as follows:
- In February 2006, Carillion acquired Mowlem plc (Mowlem), a construction company that, according to the company’s 2006 annual report, had “strengths in construction, particularly in the regional building and civil engineering markets.”  The total acquisition cost of Mowlem was £350 million, comprised of £117 million in cash, 2 million shares of Carillion common stock, and the assumption of £122.5 million of Mowlem debt.  The transaction added £512 million of goodwill to the company’s balance sheet. 
- On February 12, 2008, Carillion acquired Alfred McAlpine, which had operations in facilities management infrastructure services, civil engineering and construction. The acquisition price was £554.5 million, comprised of £381.5 million, £171.7 million in cash, assumption of and £1.3 million in loan notes.  It also involved recognition of £615 million of goodwill.  The company’s net debt at year end 2008 was £226.7 million, up from £44.9 million at year-end 2007, with acquisitions named as the primary cause of the increase. 
- In 2011, Carillion acquired Eaga plc (Eaga), a provider of energy efficiency solutions, for an aggregate purchase price of £4 million, comprised of £117.7 million of company common stock and £180.7 million of cash.  The transaction also involved recognition of goodwill by Carillion of £329.1 million. 
As noted above, the Carillion acquisition campaign resulted in material increases in the company’s intangible assets as the result of the goodwill (excess of purchase price over asset value) and its indebtedness.  The acquisition campaign was frustrated in 2014 when Balfour Beatty, the only UK construction firm larger than Carillion, rebuffed a merger offer from the company, dismissing “Carillion’s claims that the merger would generate cost savings of £175 million in ‘synergies’”. 
During this period of growth and expansion, there were changes in Carillion’s executive management team. At the time of the Molem acquisition, Philip Rogerson was Chairman of Carillion, having replaced Sir Neville Sims in May 2005; John McDonough was Chief Executive and Chris Girling was Finance Director.  Mr. Girling retired in April 2007, after having served as Finance Director since 1999. He was replaced by Richard Adam. Messrs. Rogerson, McDonough and Adam were Chairman, Chief Executive and Finance Director at the times of the Alfred McAlpine and Eaga acquisitions.  John McDonough retired as Carillion Chief Executive on December 31, 2011, and was succeeded by Richard Howson.  Philip Green had been elected Senior Non-Executive Director of the company in June of 2011.  Mr. Green became chairman of the company in May 2014. 
Questions for Directors
Imagine that you have been asked to serve as a director of Carillion between the time of the spin-off and year-end 2016.
- Would you have accepted the invitation?
- If the answer to # 1 is yes, what due diligence should you have done prior to acceptance?
- If after 2014, would the Balfour Beatty rejection of Carillion’s merger offer have been a factor in your decision? Should it have been of material importance to the company’s directors in the performance of their oversight roles?
- Shareholders only?
- Employees / Pensioners?
- Counterparties – particularly governments?
- What questions should the Carillion directors have asked during the acquisition campaign following the spin-off?
- What metrics would you use to judge management performance?
Carillion at Year-End 2016
Carillon’s Annual Report and Accounts for 2016 (2016 Annual Report) described a company that had grown substantially since its spin-off from Tarmac, generating £5.2 billion in total revenue that year.  Carillion’s revenues were generated by three lines of business:
- Support Services , which the company describes as “the provision of maintenance, facilities management and energy services for major buildings and large property estates, for both public and private sector customers, infrastructure services for roads, railways and utility networks, notably telecommunications and power transmission and distribution, and remote site accommodation services.” 
- Project ﬁnance , which “includes arranging the funding for Public Private Partnership projects, to deliver public sector buildings and infrastructure, in which we invest equity and for which we win construction and long-term support services contracts.” 
- Construction services , which “includes the delivery of a wide range of buildings and infrastructure, focused on large contracts for long-term public and private sector customers.” 
Support services contributed £2.7 billion in total revenues for Carillion in 2016; public-private partnership projects contributed £313 million; Middle East construction £668 million; and construction services from outside the Middle East £1.5 billion.  As the previous sentence suggests, Carillion had also expanded its operations geographically since the spin-off, with the UK accounting for £3.8 billion of total revenue, Canada for £596 million and the Middle East and North Africa for £787 million. 
Carillion’s Board and Senior Management
The 2016 Annual Report’s section on Corporate Governance begins with a statement from the Chairman:
Your Board remains strongly committed to ensuring that Carillion maintains and continuously improves the structures and processes required to underpin the effective delivery of its growth strategy. We believe that good governance is an essential part of the way we undertake our business on a day-to-day basis, while maintaining effective risk management, control and accountability. 
In furtherance of that goal, Carillion had a diverse and predominantly independent board, whose members were  :
The Carillion Board was also diverse in experience and external commitments, as outlined in the chart below  :
The 2016 Annual Report disclosed two changes in the composition of the Carillion board:
- Richard Adam, who joined the board as Group Finance Director in April 2007, retired on December 31, 2016. Carillion Chairman Philip Green wrote that “Richard made a major contribution to Carillion’s development and success though his outstanding financial leadership and he retired with the Board’s grateful thanks and best wishes for the future.” 
- Ceri Powell declined nomination for re-election as a Non-Executive Director of Carillion “due to relocation to take up an appointment as Managing Director of Brunei Shell Petroleum Oil.” Chairman Green lauded Ms. Powell’s “significant contribution” to Carillion. 
Richard Adam was succeeded as Group Finance Director by Zafar Khan. No successor to Ms. Powell was named in the 2016 Annual Report.
The Corporate Governance Report contained in the 2016 Annual Report defines the role of the Board as, “ownership of effective leadership and the long-term success of the Company.”  The management and governance framework to implement this role includes: (i) board committees led by Non-Executive Directors on (A) Nominations, (B) Business Integrity, (C) Sustainability, (D) Audit, and (E) Remuneration; and (ii) the following committees or groups led by the Group Chief Executive: (A) Major Projects Committee, (B) Chief Executive’s Leadership Team, (C) Pensions Subcommittee, and (D) Group Health and Safety Subcommittee. 
Matters reserved for the Board included  :
- Review of governance arrangements
- Appointments to and removals from the Board
- Terms of reference for and membership of the Board
- Approval of strategy and annual budgets
- Authorization of acquisitions and disposal activity
- Affirmation of risk management strategies and risk appetite
- Approval of financial statements, other updates to the market and recommendations on dividends
- Approval of authority levels, financial and treasury policies
- Review of internal control and risk management
- Approval of health and safety policy
The Carillion governance infrastructure operated under a Vision Statement that read as follows:
To be the trusted partner for providing services, delivering infrastructure and creating places that bring lasting benefits to our customers and the communities in which we live and work. 
It was also subject to the following statement of values  ;
We care. We respect each other and we do things safely and sustainably. It’s good for our people, our business and our local communities. We achieve together. We value the contribution of each individual and we work together to build strong, open and trusting partnerships. We improve. We listen, learn and adapt our ideas and experience into better solutions and services for our customers. We deliver. We set ourselves stretching goals, taking pride in doing a great job and helping our customers and partners to succeed.
Attendance at all board and committee meetings by directors was required and the Corporate Governance Report and the reports of the Committees named above confirm perfect attendance by all directors. 
A summary of the non-stock compensation and stock ownership of members of the Carillion Board at December 31, 2016 and for the year then ended, is set forth below.  Share ownership of Executive Directors includes amounts reported with respect to such Directors’ interests in the Company’s Leadership Equity Reward Plan (LEAP) and Deferred Bonus Plan (DBP).
- Do you agree or disagree with this statement? Why?
- Do the Past Roles and External Appointments of the Directors enhance their ability to oversee Carillion? Do any detract from this ability?
- Is the Board’s definition of its role well stated? If not, where does it fall short?
- Do the statements of Vision and Values strike you as being important to the Company? In your experience, what is the value of such statements?
- Are the cash compensation and stockholdings of the Directors appropriate? Do they enhance potential performance? Is the fact that two Directors, one of whom is the Senior Non-Executive Director, do not own any Carillion stock a good thing, bad thing or nothing?
- If you were asked to replace Ceri Powell as a Non-Executive Director of Carillion, would you accept? What due diligence would you do before deciding whether to accept?
Carillion’s Results of Operations and Financial Position
The 2016 Annual Report discloses Carillion’s financial performance on both a traditional basis and through the use of Alternative Performance Metrics (APMs) “to supplement reported results by providing greater clarity on the Group’s underlying performance and to present additional information that reflects how the Directors measure the progress of the Group” ( emphasis added ).  In general, the APMs were derived by adding back to traditionally stated amounts a number of items such as (i) non-recurring charges, (ii) recognition of partnership income, (iii) change in fair value of financial instruments (derivatives); (iv) currency adjustments, and (v) amortization of intangibles. 
With regard to the last of the adjustments just mentioned, it should be noted that intangibles were a material component of the financial position of Carillion. On December 31, 2016, the company’s intangible assets were valued at £1.67 billion, accounting for approximately 38% of total assets of £4.4 billion. In addition to a determination of the amount of such assets to be amortized over each accounting period, the Carillion board had the further responsibility of determining whether and to what extent such assets had been impaired, such that they should be written down or written off. The Audit Committee of the board made a detailed review of the portion of Intangible Assets accounted for by goodwill (£1.57 billion) and, after a review of the impairment analysis of management and the company’s external auditor (KPMG), “agreed with management that no impairment to goodwill was necessary.” 
In presenting the company’s performance for 2016, the Annual Report emphasized the following results  :
- Total revenue of £2 billion, up 14% from £4.6 billion in 2015.
- Underlying profit before taxation (an APM) of £178 million, up 1% from £5 million in 2015.
- Profit before taxation, a traditional measure from which underlying profit before taxation was derived, of £7 million, down 5% from £155.1 million in 2015.
- Underlying earnings per share of 35.3 p (an APM), up 1% over 2015, compared to basic earnings per share of 28.9 p, down 6% from 2015.
- Proposed full year dividend of 18.45p, up 1% from 2015.
- Net borrowings of £9 million, up 29% from 2015
- Two measures that appear to measure work in progress, “order book” and “pipeline,” were down or only up marginally compared to 2015.
Even using the APMs noted above, the results were not particularly inspiring. The two performance measures that showed some growth were total revenue and net debt. While the debt figure was factually determinable, the total revenue figure was based on recognition of revenues and margins from the company’s extensive portfolio of contracts.  Such recognition was, in turn, based on management’s estimates of revenues and expenses from such contracts, estimates that were reviewed by the Audit Committee of the board.  After such review, the Audit Committee had determined that management’s estimates were reasonable. 
The 2016 Annual Report also presents 14 “key performance indicators” related to the company’s operations, some of which have been discussed above. These factors are  :
- Total revenue growth.
- Underlying operating margin, an APM that declined from 5.3% in 2015 to 4.9% in 2016.
- Underlying earnings per share (an APM that adds back to earnings per share intangible amortization, non-recurring items, and non-operating items and deducts fair value movements in derivatives and “changes in contingent consideration relating to acquisitions”). 
- Cash conversion: underlying cash flow from operations divided by underlying earnings from operations (117% up from 104% in 2015).
- Work won and secured and probable orders.
- Book to bill ratio: work “won” divided by work booked as revenue (0.9%).
- Net Debt to EBITDA (0.8% in 2016, up from 0.6% in 2015).
- Net Promoter Score: a measure of customer satisfaction.
- Employee Engagement Score.
- Lost time incident frequency ratio.
- Gender balance (38% female, up from 37% in 2015).
- Contribution to profit from sustainability.
- Percentage of employees volunteering.
- Reduction in carbon footprint.
The 2016 Annual Report states that “Rigorous risk management is critical to achievement of our strategic objectives and it continues to remain a key part of our business model.”  It goes on to describe in detail the internal operational risk management infrastructure and to present and discuss ten “principal risks.”  These risks are:
- Failure to win and retain contracts
- Ineffective operational, commercial and financial management of contracts
- Management of pension scheme to ensure liabilities “are within a range appropriate to our capital base.”
- Ability to attract, develop and retain excellent people
- Effective management of risks associated with operating in overseas markets, and offering new services
- Ethics and compliance
- Systems and cyber security
- Health and Safety
- Human Rights
Included in Carillion’s risk management infrastructure was the outsourcing of its internal audit function to Deloitte LLP and retention of KPMG as its external auditor.  The Audit Committee reviewed the performance of each of these firms and determined that they should be retained to continue in their respective functions in 2017.  In the case of KPMG, continued retention was approved notwithstanding that KPMG had been Carillion’s outside auditor since the spin-off in 1999, and that there was outstanding guidance from relevant regulatory authorities suggesting the need for regular re-bidding of the function and for auditor rotation. 
Questions for Directors
- Do you think the financial and performance measures summarized above give a fair and complete picture of Carillion? What do you want to know about the company at year-end 2016 that is not included?
- Do you think the use of APMs is appropriate in the case of Carillion? Is their use generally appropriate? Does the fact that these measures reflect “how the Directors measure the progress of the Group” tell you anything significant about the Board?
- Do you think it is necessary and appropriate to include measures of gender balance, employees volunteering and reduction of carbon footprint in the key performance indicators?
- Is the continued retention of KPMG appropriate? What factors would you apply in deciding whether to retain this firm and not to have a full-scale bid process or mandatory rotation?
Decline and Fall
Based on the performance just summarized, the Carillion board, among other things:
- Declared a year-end dividend of £55 million that was paid on June 9, 2017. 
- Paid out incentive compensation to executives, including Richard Adam, who was retiring as Finance Director. 
- Affirmed, as required by the UK Corporate Governance Code, that “On the basis of both reasonably probable and more extreme downside scenarios, the Directors believe that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.” 
In April 2017, Emma Mercer returned to the UK, after working for three years in the company’s Canadian operations, to become Finance Director of Construction Services.  Ms. Mercer spotted “an anomaly in the way the company was classifying receivables balances on construction contracts, calling it ‘sloppy accounting.’”  Ms. Mercer was not the first to notice financial issues with Carillion. According to one account:
Over-reach at Carillion, which tried and failed to cap its run of acquisitions by buying Balfour Beatty, Britain’s biggest construction company … was detected by hedge funds as early as 2013. After noting that Carillion took 120 days to pay its subcontractors, short sellers decided the company was built on fragile financial foundations. 
Ms. Mercer’s expression of concern led to a review of the issue by the board and KPMG that resulted in a conclusion “that although Carillion had misclassified assets, it had not misstated revenue.  That review did, however, act as the trigger for a wider contract review. 
As the result of the reviews just mentioned, on July 10, 2017, just over four months after publication of the 2016 Annual Report, Carillion published a document entitled “H1 2017 Trading Update.” (Trading Update)  This document is notable for a number of reasons:
- Richard Howson, the Group Chief Executive of Carillion, whose strategic overview was prominent in the 2016 Annual Report, had been replaced by Keith Cochrane, formerly Senior Independent Non-Executive Director, who is described as “Interim Group Chief Executive.”
- Exiting all public private partnerships
- Exiting Egypt, Saudi Arabia and Qatar construction
- Sale of 50% of Oman business
- Bid only on lower risk procurement routs on construction contracts
- Three UK PPP construction contracts: £375 million
- Exits from overseas engagements: £470 million
- Total impairments of £845 million are said to have a net negative cash impact of only £150 million. That said, the aggregate impairments exceed the company’s year-end 2016 Equity of £730 million.
While the Trading Update may have shown Carillion to be balance sheet insolvent, the company’s board stood by its determination that it was a going concern and took steps to address its problems. EY was retained to support the strategic review mentioned above with a focus on cost reductions and cash collections; both bank and capital markets financing were sought; and Zafar Khan was “sacked” as Finance Director, to be replaced by the redoubtable Emma Mercer. 
On September 29, 2017, Carillion announced its first half results of operations  . The most significant items in the report were:
- Increase of impairment charge to £1,045 million
- Pre-tax loss for the period of £1,153 million
- Negative equity of £405 million.
Following the issuance of the first half results of operations, Carillion’s management and board continued on their program to save the company. This program continued through year-end and included (i) consultant’s report; (ii) attempt at a secondary offering of stock; and (iii) appeals to the UK government for aid (based on the company’s significance as a government contractor). These efforts did not lead to additional funding or support for Carillion.
On January 15, 2018, the company found itself with no choice but to apply to the UK High Court of Justice for compulsory liquidation. The High court appointed PwC as Special Managers to act on behalf of the Official Receiver  . According to the joint parliamentary report discussed below, Carillion “went into liquidation … with liabilities of nearly £7 billion and just £29 million in cash.” 
Carillion’s insolvency remains a major scandal in the UK.  In addition to wiping out its shareholders, the company’s demise left in its wake: (i) unfunded pension liabilities of just under £2.6 billion, with respect to 27,000 recipients and potential recipients, the largest hit ever to the UK’s equivalent of the Pension Benefit Guaranty Corporation; (ii) 30,000 unpaid subcontractors who are owed £2 billion; and (iii) uncertainty with regard to 450 service contracts between Carillion and various UK governments, with an initial estimated cost of just under £150 million to ensure continuity of services. 
In May 2018, the Work and Pensions Committee and the Business, Energy and Industrial Strategy Work and Pensions Committee of the UK Parliament published a report resulting from a joint inquiry into the demise of Carillion. The report, which was instituted in furtherance of the committees’ responsibility for the health of pensions in the UK, was scathing. Its opening passage graphically summarizes what is to follow:
Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long. 
The Parliamentary Report, which is well done and well worth reading in its entirety, then goes on to review a catalogue of ill-advised or bad conduct by Carillion, much of which has been discussed above.
The Parliamentary Report discusses the oversight failures of a number of stakeholders in Carillion, including governmental entities responsible for pension funding and public contracts, its accountants and major shareholders. It is unstintingly and particularly critical of Carillion’s board, concluding that, “Carillion’s board are both responsible and culpable for the company’s failure.”  Among the Parliamentary Report’s specific findings (quoted below) are that  :
- Carillion’s management lacked basic financial information to do their job. A January 2018 review by FTI Consulting for Carillion’s lenders found the “presentation and availability of robust historical financial information”, such as cash flows and profitability, to be “extremely weak.” … This accorded with a presentation by Keith Cochrane to the board on 22 August 2017 which identified “continued challenges in quality, accessibility and integrity of data, particularly profitability at contract level.” For a major contracting company, these are damning failings.
- Such problems were not restricted to financial information. When it collapsed in January 2018, the total group structure consisted of 326 companies, 199 based in the UK, 186 of which are now in compulsory liquidation. Sarah Albon, Chief Executive of the Insolvency Service, told [the Committees] that the company’s “incredibly poor standards” made it difficult to identify information that should have been “absolutely, straightforwardly available”, such as a list of directors. Responsibility for ensuring the company is run professionally lies with the board. Stephen Haddrill, Chief Executive of the Financial Reporting Council (FRC), said “there must be enormous cause for concern about how the company was governed.”
The Parliamentary Report makes detailed and explicit findings regarding the shortcomings of Carillion executive management and Board leadership. Non-executive directors are not spared; the report finds at its outset, “The company’s non-executive directors failed to scrutinize or challenge reckless executives.” 
In summing up its view of the board’s performance, the Parliamentary Report is eerily reminiscent of the Federal Reserve’s assessment of the Wells Fargo board, to wit:
We recommend that the Insolvency Service, in its investigation into the conduct of former directors of Carillion, includes careful consideration of potential breaches of duties under the Companies Act, as part of their assessment of whether to take action for those breaches or to recommend to the Secretary of State action for disqualification as a director. 
The Carillion insolvency is the result, among other things, of a profound failure of corporate governance. Like the Wells Fargo case from the US, referred to above, it raises disturbing, and difficult questions about how competent and well-meaning directors can go so wrong in the discharge of their duties. Determining when and how an independent director should seek to influence the affairs of a corporation and how to do so effectively is not an easy question and should be approached carefully and with humility. But failing to ask the right questions or vocalize concerns can allow problems to metastasize, in some cases (Carillion’s), to the point where there is no cure.
 Carillion, Plc. Annual Report and Accounts for 2016, p.1. Available at: https://carillionplc-uploads-shared.s3-eu-west-1.amazonaws.com/wp-content/uploads/2017/03/0930AQ-carillion-annual-report-2016-original.pdf (2016 Annual Report).
 Ibid, pp. 2,3,46,83,92; Gill Plemmer, “The Collapse of an over-stretch Carillion,” Financial Times, January 14, 2018, available at: https://www.ft.com/content/0e29ec10-f925-11e7-9b32-d7d59aace167 .
 http://www.tarmac.com/news-and-media/news/2018/january/carillion-and-tarmac/ .
 “The Investment Column: Tarmac’s Construction Arm Spin-Off Sets Bid Bells Ringing,” The Independent, July 16, 1999. Avilble at https://www.independent.co.uk/news/business/the-investment-column-tarmacs-construction-arm-spin-off-sets-bid-bells-ringing-1100476.html .
 Lisa Buckingham, “Tarmac weathers demerger storm,” The Guardian, July 8, 1999. Available at https://www.theguardian.com/business/1999/jul/09/13.
 Anna Minton, “Tarmac spins off construction arm as Carillion,” The Independent, June 19, 1999. Available at: https://www.independent.co.uk/news/business/tarmac-spins-off-construction-arm-as-carillion-1100147.html .
 Ibid. In the US, PFI projects may be loosely equated with what we call “public-private partnerships.” It refers to private financing and management of public infrastructure and facilities.
 Lisa Buckingham, “Tarmac Investors Threaten Revolt,” The Guardian, July 1, 1999. Available at https://www.theguardian.com/business/1999/jul/02/12 .
 This is Money, “Tarmac and Carillion Results,” October 4, 1999. Available at: http://www.thisismoney.co.uk/money/news/article-1576100/Tarmac-and-Carillion-results.html .
 Roger Crowe, “Tarmac Pensioners join pay rebels,” The Guardian, July 5, 1999. Available at: https://www.theguardian.com/business/1999/jul/06/6
 Lisa Buckingham, “Tarmac Weathers Demerger Storm,” The Guardian, July 8, 1999. Available at: https://www.theguardian.com/business/1999/jul/09/13
 Minton, op cit., note 16.
 The Investment Column, op cit. note 12.
 House of Commons Business, Energy and Industrial Strategy and Work and Pensions Committees: Carillion, Second Joint report from the Business, Energy and Industrial Strategy and Work and Pensions Committees of Session 2017–19, Tenth Report of the Business, Energy and Industrial Strategy Committee of Session 2017–19,
Twelfth Report of the Work and Pensions Committee of Session 2017–19 Report, together with formal minutes relating to the report, May 16,2018 (Parliamentary Report) pp. 8, 13. Available at: https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/carillion-inquiry-17-19/
 Carillion 2006 Annual Report and Accounts, pp. 7, 18. Available at: http://www.annualreports.co.uk/Hosted Data/Annual Report Archive/ LSE_CLNN_2006.pdf . (2006 Report)
 Ibid, p. 18.
 Ibid, pp. 18, 19.
 Carillion 2008 Annual Report and Accounts, p. 101. Available at: : http://www.annualreports.co.uk/Hosted Data/Annual Report Archive/ LSE_CLNN_2008.pdf . (2008 Report)
 Ibid, p. 15.
 Carillion 2011 Annual Report and Accounts, p. 93. Available at: http://www.annualreports.co.uk/Hosted Data/Annual Report Archive/ LSE_CLNN_2011.pdf . (2011 Report)
 Ibid, p. 92.
 Parliamentary Report, op cit. note 20, pp. 13. 14
 Ibid, p. 13.
 2008 Report, op cit. note 21.
 2008 Report, op cit. note 24; 2011 Report, op cit. note 27.
 2011 Report, op cit. note 27,, p. 15.
 Parliamentary Report, op cit. note 20, p. 8.
 2016 Annual Report, op cit. note 1, p. 1.
 Ibid, p. 2.
 Ibid, p. 3.
 Ibid, p. 49.
 Ibid, pp. 50-51
 Ibid, p. 7.
 Ibid, p. 53.
 Ibid, p.52.
 Ibid, p. 53.
 Ibid, pp. 53, 54,58, 59, 60, 61.
 Ibid, pp. 66, 71.
 Ibid, pp. 51, 140.
 Ibid, p. 1, note 1. Italics added.
 Ibid, pp. 140-143.
 Ibid, p. 62.
 Ibid, p. 1.
 Ibid, p. 62.
 Ibid, pp. 62, 132.
 Ibid, pp. 18-19.
 Ibid, p. 141.
 Ibid, p. 31.
 Ibid, p.p. 31-37.
 Ibid, pp. 61-63.
 Parliamentary Report, op cit., note 20, p. 9.
 2016 Annual Report, op cit., note 1, p. 65.
 Ibid, p. 31.
 Parliamentary Report, op cit., note 20, pp. 9, 45.
 Ibid, p. 45.
 Plemmons, op cit. note 2.
 Parliamentary Report, op cit. note 20, p.45.
 Available at: https://carillionplc-uploads-shared.s3-eu-west-1.amazonaws.com/wp-content/uploads/2017/07/0538BR-trading-update-presentation-original.pdf . (Trading Update)
 Parliamentary Report, op cit., note 20, p. 9.
 Available at: https://carillionplc-uploads-shared.s3-eu-west-1.amazonaws.com/wp-content/uploads/2017/09/0620CV-2017-interim-results-original.pdf
 Parliamentary Report, op cit. note 20, p.10.
 Ibid, p.3.
 See, e.g, FT Collections: Carillion’s collapse: risk and failure at: https://www.ft.com/content/2cab2ac2-fb83-11e7-9b32-d7d59aace167
 Parliamentary Report, op cit. n.20 , p.3.
 Ibid, p. 3.
 To come.
 Ibid, p.27. .
 Ibid, p. 4.
 Ibid , p. 4.
0 thoughts on “ Carillion Plc: A Governance Case Study from the UK ”
In the early 2000s, Carillion Plc became a beacon for a category of companies that had made unparalleled progress in financial management. This study is interesting because it reveals and provides an objective assessment of the company’s financial performance. Thanks
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- Research article
- Open Access
- Published: 21 October 2019
Understanding corporate governance of healthcare quality: a comparative case study of eight Australian public hospitals
- Alison Brown ORCID: orcid.org/0000-0003-2407-842X 1
BMC Health Services Research volume 19 , Article number: 725 ( 2019 ) Cite this article
Patients are sometimes harmed in the course of receiving hospital care. Existing research has highlighted a positive association between board engagement in healthcare quality activities and healthcare outcomes. However, most research has been undertaken through surveys examining board engagement in a limited number of governance processes. This paper presents evidence of a comprehensive range of processes related to governing healthcare quality undertaken at the corporate governance level. This provides a more detailed picture than previously described of how corporate governance of healthcare quality is enacted by boards and management.
A comparative case study of eight Australian public hospitals was undertaken. Case studies varying is size and location were selected from two Australian states. Data collection included a review of key governance documentation, semi structured interviews with board members and senior management and an observation of a board quality committee meeting. Thematic analysis was undertaken to identify processes related to key tasks in governing healthcare quality.
Two key tasks in the corporate governance of healthcare quality, evaluating healthcare quality and overseeing quality priorities, were examined. Numerous processes related to these two tasks were found. Case studies, while found to be similar in engagement on previously identified processes, were found to differ in engagement in these additional processes. While generally low levels of engagement in processes of overseeing quality priorities were found, cases differed markedly in their engagement in evaluating healthcare quality processes. Additional processes undertaken at some case studies represent innovative and mature responses to the need for effective corporate governance of healthcare quality. In addition, a group of processes, related to broader governance taskwork, were found to be important in enabling effective corporate governance of healthcare quality.
The work of governing healthcare quality, undertaken at the corporate governance level, is redefined in terms of these more detailed processes. This paper highlights that it is how well these key tasks are undertaken that is important in effective governance. When processes related to key tasks are omitted, the rituals of governance may appear to be satisfied but the responsibility may not be met. Boards and managers need to differentiate between common approaches to governance and practices that enable the fulfilment of governance responsibilities. This study provides practical guidance in outlining processes for effective corporate governance of healthcare quality and highlights areas for further examination.
Peer Review reports
Variability in the quality of hospital care is evident through high profile failures and measures of clinical processes and outcomes [ 1 , 2 , 3 , 4 ]. Reviews of hospital quality failures have indicated a range of factors contributing to preventable patient harm. A common factor identified across reviews is the failure of boards and senior management in overseeing and responding to issues with healthcare quality in their hospitals [ 5 , 6 ]. Research has increasingly turned toward understanding the contribution of corporate governance to the variability observed in hospital care.
Studies, largely undertaken in the US and UK, demonstrate variable engagement of hospital boards in governance processes such as time spent discussing quality [ 1 , 7 , 8 , 9 , 10 , 11 ], placing an item for quality on the board agenda [ 8 , 9 , 12 ] and the regular board monitoring of quality measures [ 8 , 10 , 12 , 13 , 14 ]. The empirical literature further demonstrates evidence of a generally small but significant positive association of healthcare quality measures and board engagement in some governance processes. For example, greater time spent discussing quality at the board [ 10 , 12 , 13 ] and board review of quality performance measures using dashboards or balanced scorecards [ 12 , 13 , 15 , 16 ] have both been linked to better healthcare quality.
Research demonstrating an association between governance engagement and healthcare quality measures has highlighted the importance of participation in corporate governance work. However, surveys have used summary descriptions of activities which do not reflect the detailed inner workings of corporate governance. The purpose of this paper is to address this limitation and build on cross sectional survey data and emerging qualitative research to understand in greater detail how corporate governance of healthcare quality is enacted.
This paper describes in detail processes involved in the corporate governance of healthcare quality, herein referred to as healthcare quality governance, from a comparative case study of eight Australian public hospitals. Processes are identified from an analysis of case study data obtained through document review, interview and observation. The argument is made that effective governance is predicated on engagement in a comprehensive range of processes that are integral to effectively implementing important healthcare quality governance tasks. This paper contributes to the literature on healthcare governance in comprehensively detailing these processes. Through presenting a more complete picture of processes, practical guidance is provided to hospitals in reviewing and strengthening the work of governing healthcare quality through fostering greater understanding of and engagement with key processes.
The paper begins by outlining healthcare quality governance tasks and then describes the methods used for an in-depth exploration of two key tasks, evaluating healthcare quality and overseeing quality priorities. Processes related to these two tasks are then identified. Finally, the concept of engagement in healthcare quality governance is re-examined. The paper concludes by urging governance practitioners to differentiate between common approaches to governance, and engagement in a more complete range of processes that further the objectives of healthcare quality governance.
Healthcare quality governance tasks
Corporate governance is ‘the system by which companies are directed and controlled’ [ 17 ]. The dominant model of corporate governance is for organisations to be under the direction of a board [ 18 ]. The board model of corporate governance is characterised by board directors acting together, with equal influence, to collectively make decisions about the organisation.
Decisions made by the board are informed and guided by information and advice provided by management. In this paper, the focus is on the corporate governance work of boards and managers in overseeing healthcare quality.
The broader governance literature abounds with descriptions of the boards’ role in setting strategy, assessing organisational performance, and stakeholder engagement [ 19 , 20 , 21 , 22 ]. Detailed guidance on implementing the board’s role in governing healthcare quality in the peer-reviewed literature is less evident. Board tasks are often described broadly in terms of ‘developing appropriate organisational strategies, incentives and cultures to support the delivery of quality and safety’ [ 23 ] and ‘ensur[ing] high quality care’ [ 24 ]. Some authors, implicitly or explicitly, reference an agency perspective of governance and discuss the role in terms of quality oversight [ 12 ] or accountability [ 16 ]. Detailed articulation of healthcare quality taskwork is more commonly found in normative literature and include the following tasks:
Evaluating and improving healthcare quality performance [ 1 , 16 , 25 , 26 , 27 , 28 ]
Setting and oversight of strategic quality priorities [ 1 , 2 , 12 , 13 , 16 , 25 , 26 , 27 , 28 , 29 , 30 ]
Promoting leadership and culture [ 25 , 27 , 28 , 31 , 32 ]
Ensuring effective systems and processes are in place to maintain and improve quality [ 1 , 28 , 31 , 32 , 33 , 34 ].
Similarly, processes related to each healthcare quality task are not described in a comprehensive manner in the literature. Evaluating healthcare quality, is often presented in a simple and passive way. For example, the board ‘reviewed a quality dashboard’ [ 12 ] or ‘regularly receives formal reports’ [ 35 ]. Reviewing data does not by itself equate to effective evaluation.
A gap in the literature exists in providing a more complete understanding of a range of processes that support the enactment of key tasks. This paper seeks to address this gap through examining how boards and managers undertake the complex work of governing healthcare quality. The study focuses on processes related to two key tasks, evaluating healthcare quality and overseeing quality priorities, reflecting their relative importance in healthcare quality governance and ease of corroborating their related processes through data collection limited to the board and Board quality committee (BQC) and the research methods used. Additional processes, some previously unidentified and some less commonly identified in the literature, have been brought together to portray a more complete picture of how healthcare governance is enacted. The comprehensive exploration of processes, undertaken in this study, provides the basis for re-examining the concept of governance engagement in healthcare quality activities.
International empirical healthcare governance research has largely employed quantitative survey methods to develop an initial understanding of engagement in healthcare governance processes and associations with healthcare outcomes. Limitations associated with surveys include the exploration of a small number of briefly described board processes and the use of a single respondent limiting the perspective on governance (see for example [ 8 , 13 , 36 , 37 ]). This study uses a comparative case study approach. Case studies allow the use of multiple data sources. The researcher is able to compare and corroborate findings across different data sources to develop ‘a confluence of evidence that breeds credibility, that allows us to feel confident about our observations, interpretations and conclusions’ [ 38 ]. The qualitative research methods used in this study are particularly suited to detailed investigation of complex phenomena, such as governance, and provide detailed information to deepen understanding [ 39 ]. The approach to case study selection, data collection methods and thematic analysis within the comparative case study design are outlined in this section.
Eight Australian public hospitals were recruited as case studies, as part of a broader research project investigating the characteristics of effective governance. Commonwealth health reform in 2011 saw the creation, among a host of other reforms, of local hospital networks (LHNs) comprising single or small groups of functionally connected public hospitals and related services across Australia. However, LHN numbers and governance structures vary between states reflecting a combination of legacy arrangements and state level negotiated reform agreements and legislation. LHNs are governed by boards in most, but not all, jurisdictions. Only LHNs governed by boards with direct responsibility and accountability for governing healthcare quality were relevant to this study. LHNs of this type occurred in sufficient numbers in three states of Australia; Queensland, Victoria and New South Wales. The latter two were selected to be included in the study for practical travel reasons.
Purposive case selection was undertaken to extend the examination of healthcare quality governance to a broader range of public hospitals. Case studies were undertaken in six Victorian and two NSW LHNs. The smaller number of NSW case studies were recruited to enable comparison of state-level contextual factors operating on hospitals. Stratified purposive sampling was employed, with Victorian hospitals stratified according to size and location. This ensured a mix of hospitals of different size and complexity from which to undertake recruitment. Given the similar size of NSW LHNs, a rural and urban site were selected. The overall sample included 4 large multi campus hospitals, 2 medium sized (subregional) rural hospitals and 2 small rural hospitals. All case studies were accredited under national standards. The case or unit of analysis was corporate governance at the hospitals whether it be multisite or single site.
Data collection and analysis
Data collection was undertaken from July 2016 to April 2017 in the form of document review, interviews and a BQC meeting observation. Evidence confirming the existence of processes already identified in extant literature were first sought. These known processes were later supplemented with additional processes, emerging from the data review, which supported a task. Twelve months’ worth of Board and BQC papers were reviewed at each case study to enable a comprehensive insight into governance activity over a complete annual cycle [ 40 ]. Other key governance documents reviewed included terms of reference and planning documents. Systematic documentary analysis was undertaken via a document review template, in the form of a word document, used to summarise the raw data from each case study. The document captured evidence of processes related to key tasks.
Semi-structured interviews were used to clarify and supplement the understanding of governance processes examined in the document review and provided the flexibility to expand on points raised by interviewees [ 41 ]. Interviews were requested with the CEO, BQC chair, the senior staff member responsible for healthcare quality and both a board member and clinical executive staff member who attended the BQC. The BQC chair, rather than the Board chair, was interviewed as a detailed exploration of healthcare quality governance at the BQC was required to understand taskwork processes. Thirty-nine participants were interviewed across all case studies, of which 15 were board members, as shown in Table 1 . Note the eight case studies are denoted by the nomenclature C1 to C8.
Interviews were based on an interview schedule that included questions exploring the work of management and board in governing healthcare quality. Transcribed interviews were imported into NVivo software for analysis. Template analysis, a form of thematic analysis, was employed to code the interview transcripts and involves the development of a codebook to guide the categorisation of segments of text [ 42 ]. Interviews were first coded deductively in NVivo according to a codebook developed from a previously developed conceptual framework [ 43 ]. Three interviews were initially coded to refine the codebook and then all interviews were coded via the revised codebook. Coding of the data involved two stages, an initial coding followed by a review of coding decisions. This is in line with processes for template analysis described by Brooks et al. [ 44 ]. A second inductive and iterative coding process was applied to the initial interview analysis. Material initially coded to framework constructs was then reviewed to identify underlying or emergent themes. Additional coding constructs were created and added to the codebook.
An observation of a single quality committee meeting, ranging in length from 50 to 120 min, was undertaken at each case study. Observations provide a detailed view of meeting practices and dynamics in ‘real time’ that cannot be fully captured by minutes or second-hand descriptions [ 45 ]. While the board has overall responsibility for healthcare quality, the BQC, rather than Board, was chosen as the observation site as this is the forum at which most corporate governance work on healthcare quality occurs [ 46 ]. Observation notes were analysed for key processes of governance.
Once all data sources had undergone separate initial thematic analysis, a further process was undertaken on the entire data set with a focus on the question of how healthcare quality governance was enacted. Identifying processes involved multiple reviews of the entire data set. All coding and thematic analysis was undertaken by a single researcher, undertaking research for a doctorate.
The study received approval from the Human Research Ethics Committee at the University of Melbourne (Ethics ID: 1646640.2). Informed consent for participation was obtained from all interview participants. Approval was sought from the CEO at each case study for researcher attendance at BQC meetings.
This study identified a range of healthcare governance processes that enable effective execution of two important healthcare quality governance tasks. In addition, several broader governance processes, undertaken by leaders and influencing how well the Board and BQC addresses their purpose, that have received little attention in the literature, were identified. The processes identified are presented in Table 5 and discussed in this section.
Processes found to be integral to the task of evaluating healthcare quality include; regular robust reporting of a range of data through a range of formats, clear identification of variation and action taken in response and; development and review of a detailed reporting framework, and are described in the following sections.
Reporting on quality is more than dashboards
All case studies undertook regular healthcare quality reporting, however, the format and content of reporting varied greatly between case studies. Dashboard reporting at the corporate governance level was examined first. Most case studies were found to have dashboards at both the Board and BQC level. There was less variation in the use of indicators informing healthcare quality evaluation observed between case studies when all dashboards were reviewed, than when only the main board dashboard was considered as shown in Table 2 .
Between 45 and 94% of dashboard indicators in five case studies were derived from state government service agreements. Service agreement performance indicators were not necessarily seen as being the indicators that were ‘important for us’ (Quality Director, C2).
Greater variation in the types of internally and externally generated reports, collectively to be referred to herein as ‘stand-alone reports’, was found at the corporate governance level. Stand-alone reports informing healthcare quality evaluation routinely scheduled at the Board and BQC as indicated in reporting calendars and agendas are outlined in Table 3 .
As can be seen from Table 3 , the BQC was found to be the main forum for comprehensive exposure to quality reporting. Except for accreditation reports, there was considerable variation in stand-alone report types between case studies. This variation is evident in healthcare quality reports that can be considered fundamental, for example serious incidents and patient feedback. Processes related to developing an appropriate suite of stand-alone reports are important to consider in addition to dashboard reporting. Both reporting approaches are addressed in the next section.
Reporting for improvement
Healthcare quality data needs to be reported in a way that enables boards to easily identify variation, the actions taken to address unacceptable variation and whether actions are effective in addressing issues. This study found varying engagement in processes that support identifying variation and a quality improvement approach.
Little evidence was found of widespread use of benchmarking, allowing organisational comparisons to be made, regularly presented at the board or BQC. Where benchmarking information was available in external reports, data were often reproduced in board and BQC papers in terms of their relationship to the associated government performance target or their trend in the hospital over time.
Some dashboards used short range trend data (< 12 months) and/or trend arrows to assist in identifying changes in performance since previous reporting periods. Board dashboards, in all five case studies that had a summary indicator table, used traffic light colour coding of results to signal relative performance in relation to a target. Triggering of red or orange flags in relation to unrealistic targets was a concern for many interviewees as explained.
Your performance is deteriorating in factor X. But when you look at it it's not statistically significant it's just common cause variation and it actually, you know, when you’ve got minimal resource to focus. But what it does is send a red flag to the seniors and the board go ‘oh my god we’re not doing well in this’ but in fact we’re actually, we're OK. (Quality Manager, C5)
Case studies did not always establish targets for quantitative healthcare measures. When present, the origin and rationale for target setting was not often transparent. The contentious nature of organisational target setting was evident. Views differed as to the value of setting aspirational targets, reflecting a ‘do no harm’ approach that often trigger red flags to which the board can became habituated, versus setting ‘realistic’ targets that acknowledge the inherent risk of acute healthcare delivery.
Using falls as an example [the quality manager] always explained fairly clearly that yes, there's a certain amount of falls that aren't preventable. So, we can't stop, you know, zero's not really a target unfortunately. So, it's the preventable falls where we really try and focus on and work out. (BQC chair, C4)
This quote highlights how this hospital responded to the challenge of target setting, with a commonly used indicator, through redefining the indicator and reporting on preventable falls.
In several case studies, dashboard summary healthcare quality indicator tables were supplemented with more detailed indicator information in a complementary report. Detailed indicator reports consisted of graphical or tabular data indicating longer term trends. Along with this, two distinct types of commentary were provided. Firstly, commentary analysing and interpreting the data and identifying unacceptable variation. Secondly, commentary regarding the actions implemented, including, at some case studies, a ‘no action required’ option if data or variation was deemed to be acceptable. This analysis was valuable in translating data into knowledge and supporting board members understanding whilst promoting active reflection and data interpretation by staff.
Variation in the comprehensiveness of data presentation was also seen in stand-alone reports. This variability is highlighted in Table 4 with a review of reports on incidents presented at a corporate governance level, produced by seven case studies. C3 was the exception and reported on select incident indicators (falls and pressure injuries) as part of an indicator dashboard report rather than a more comprehensive standalone report on incidents.
Several processes used to identify performance variation, not commonly addressed in the literature, were found in case studies and are seen in incident reporting. Some case studies used graphs to display disaggregated program level data to inform an understanding of variation between programs. Data changes may be due either to common cause variation, non-statistically significant variation that affect all results in a stable process or significant cause variation, due to unusual or unanticipated but potentially identifiable forces [ 47 , 48 , 49 ]. A minority of case studies used process control charts to distinguish between significant special cause variation and the normal variation or ‘noise’ in any process. Features such as briefing papers accompanying stand-alone reports were felt to be very useful in highlighting the significance of complex data presented within reports and actions required.
Three case studies presented standalone reports that were thematic reviews of areas, through either clinical risk area annual reports, longer-term analyses of data or reviews of the effectiveness of actions in areas such as incidents or patient feedback. These longer-term thematic reviews shifted the focus from evaluating a narrow reporting period in dashboards to a comprehensive review of trended data seeking to understand contributing factors and intervention effectiveness. As explained,
At the end of the calendar year let’s analyse all the incident data. Let’s really identify what the issues are and then let’s work out priorities, from a system level. (Quality Manager, C5)
A few case studies engaged in innovative internal methods of evaluating and detecting variation in healthcare quality. Sophisticated internal or clinical audit mechanisms were employed to identify performance variation and system issues. These mechanisms move beyond familiar compliance and accreditation-related audit processes and represent comprehensive internal reviews of clinical program areas or clinical pathways through the comparison of existing care with internally defined evidence informed standards of care.
Variation in reporting approaches informing an understanding of areas for improvement is strikingly highlighted in the reporting of results from a state department-generated patient experience survey. All case studies within a state receive the same report in an identical format varying only in the identification of organisational details. At C7, no information from the report was presented at the board or BQC level and the hospital was considering how best to use this data to drive improvements. At two case studies the lengthy report was reduced to one or more quantitative indicators that were also government performance agreement indicators. In one of these case studies this was a single indicator subject to a departmental pricing for quality incentive. This contrasts with the remaining five case studies that provided the entire report and in four case studies this was accompanied by a briefing paper summarising the issues and actions taken.
Variation in understanding what constitutes important governance-level information in relation to patient experience is evident and reflects different objectives in presenting data. Comprehensive reporting of state patient experience survey results with briefing papers highlights case studies using reports to inform an understanding of current areas of strength and areas for improvement reflecting a quality improvement focus. In contrast, case studies that reported a few performance agreement indicators have a compliance focus.
A quality and safety reporting framework
All case studies made incremental changes to reporting through discussions arising at meetings. These iterative discussions were valuable in refining reporting to reflect the current context ‘for the board that we’ve got and for the situation that we’re in’ (Medical Director, C3). Some case studies supplemented incremental data review with formalised processes. Formal review processes were facilitated by detailed annual calendars of reporting and/or detailed indicator frameworks that made transparent targets, their derivation, and the rationale for changes to indicators or targets. These documents were then periodically reviewed and formally endorsed by Board. The documents represent a reporting framework that give a Board a clear helicopter view of data reporting across dimensions of quality, program areas, quality systems, clinical risk areas and sites within a hospital network. This approach contrasts with C8, where no formalised data review was evident,
We’re just presenting what has historically been presented for the last couple of years. We haven't had a discussion on are there other things the board wants to be seeing and I don't think we've really sat down as an executive and discussed what else should we be providing. (CEO, C8)
A formal approach to data selection was aided by the process of developing a quality definition. The challenge ‘to work out what actually quality is’ (BQC chair, C6) was experienced not only by board members, at some case studies, but by management.
It's a challenging area to say the least, about getting that governance right around safety and quality. Cos it’s, it’s sometimes hard to put your finger on what it is. (CEO, C8)
Definitions of healthcare quality that describe potentially measurable clinical process and outcome categories, such as safe and effective, were found to assist managers and board members to understand the elements that make up quality healthcare and made apparent the broad range of data needed to inform quality evaluation.
Formal and informal mechanisms for board engagement in data selection, endorsement and review are both important in ensuring effective evaluation of healthcare quality. However, formal mechanisms involving the use of reporting frameworks were less commonly used.
Oversight of healthcare quality priorities
Seven case studies had priorities in their strategic plan for addressing existing healthcare quality couched broadly in terms similar to ‘meeting or exceeding standards of care’ or ‘improving the quality of patient care’. These were seen as being ‘a bit loose’ (CEO, C4). As explained,
While the directions are probably OK, the detail underneath them about actually being much more explicit in what we’re actually looking to achieve [is missing]. (CEO, C 1).
The lack of specific strategic healthcare quality priorities seen at most case studies creates a vacuum where staff and board members find it hard to articulate and operationalise strategic initiatives. The need for specific, measurable quality priorities was acknowledged by several interviewees.
We’ll actually [in the future] put a smart objective together around particular focus areas and that certainly is the stuff that you see in the NHS and where they’ve actually been very targeted around the things that they will focus on. (CEO, C1)
If I said we are going to eliminate sepsis, hospital acquired sepsis in the acute hospital by June 2017, people know what it means. Yet, where to me 'providing the right care' … it's a catch all phrase. But there's no specific thing that if you walked around and spoke to everybody and said what are the safety and quality goals for this year. They wouldn't know. (Quality Manager, C5)
Mechanisms for cascading quality priorities from strategic plans to subordinate governance planning mechanisms included operational plans or a standalone quality plans. Broad strategic quality priorities were cascaded into these plans as a catch-all for a range of government service agreement priorities or other emergent external requirements. Specific quality priorities were seen to be driven externally because external priorities were often ‘more specific’ (Quality Director, C2) than internal strategy.
Broad strategic quality priorities, while useful for maintaining flexibility, were found to be a barrier for priorities being operationalised and reviewed at board level. Only half the case studies reported on progress with strategic priorities at the board and less than half reported on progress with quality priorities at the BQC. Reporting on progress was often through a range of healthcare quality data and KPIs selected to reflect broad strategic directions. Only three case studies had evidence of specific measurable quality priorities identified for which progress could be evaluated. The influences on the development of specific healthcare quality priorities are outlined in Fig. 1 .
Influences on corporate governance healthcare quality priorities
Most case studies had evidence of substantive quality improvement initiatives being undertaken at an operational level, yet these internal emergent priorities were frequently not made transparent at board level. Only three case studies had corporate governance level planning mechanisms in place that captured and made transparent both planned and emergent priorities. Assessing progress with quality priorities was therefore limited by at least two factors; the lack of specific measurable quality priorities and the lack of transparent reporting on quality priorities at the board or BQC level.
Additional processes related to broader governance activities that are important in supporting oversight of healthcare quality were identified in this study. These processes, undertaken by leaders, influence how well a Board and BQC understand and enact healthcare quality governance tasks and have received little attention in the literature. Processes include board and committee orientation and skill development, agenda setting, reviewing data reporting and reviewing governance effectiveness through terms of reference and board and committee evaluations (see Table 5 ).
Case studies were seen to vary in their provision of, and comprehensiveness of, board member orientation. Four case studies provided board member orientation that included content specific to healthcare quality and two of these provided a one to one meeting with the quality manager or executive. Structuring meeting agendas and papers is a leadership process that assists effective and efficient running of meetings. At three of the case studies there was evidence of the BQC chair working closely with, or being guided by, the senior quality staffer convening the meeting to shape the agenda and information presented. Committee and reporting review processes are important in ensuring meeting processes and reporting are satisfying the BQCs’ key tasks but occurred at only five case studies.
Tasks and processes
All processes found to be important in supporting the effective governance of healthcare quality are outlined in Table 5 .
Through an in-depth exploration of multiple case studies, a range of processes related to two healthcare quality governance tasks have been identified. The need for regular, robust and timely board reports to inform the evaluation of healthcare quality is a key activity identified in the literature [ 11 , 30 ]. The extant literature has focused on the presence (and to a lesser extent the content) of board dashboards (see for example 12, 15). This study found the main board dashboard is not a reliable indicator of healthcare quality data reported at the board level for two main reasons. Firstly, the board dashboard is not the only dashboard seen at a corporate governance level and secondly, dashboards reflect a limited range of information, often with a focus on indicators derived from state department of health performance measures. This finding reflects that of Weggelaar-Jansen et al. [ 50 ] who found that hospital dashboards focus on easily available external quantitative data. Serious incident and infection measures, which are commonly used departmental performance measures, often represent relatively infrequent events and are generally less sensitive indicators of changes in healthcare quality, unless occurring frequently at a particular hospital [ 4 ].
Goeschel et al. [ 51 ] highlight, a limited focus on the presence or content of dashboards does not inform what other information the board gets or how this information is used. Greater variation was found in the types and presentation of internally and externally generated reports. Processes around both the development of both dashboards and stand-alone reporting are therefore important to explore when examining the task of healthcare quality evaluation.
Mechanisms for identifying variation in healthcare quality such as trending and benchmarking have been examined in previous surveys [ 12 , 15 , 16 ] but relatively little attention has been paid to how well these mechanisms are used. In this study, the traffic light coding, short-term trend data and trend arrows, that were used frequently in dashboards did not assist in identifying the nature of variation occurring. When discrete time point data is presented it is more than likely that figures in the previous reporting period will be higher or lower [ 52 ]. Changes in discrete time point results can trigger red or orange flags in response to non-significant or common cause variation or the normal ‘noise’ within a process [ 53 , 54 ]. Red and orange flags triggered in relation to unrealistic targets can draw the board into unnecessary discussion of common cause variation [ 47 , 52 ]. The study also found the use of aspirational no harm targets for some indicators were a problem in frequent triggering of dashboard red flags to which boards members can become habituated. Short term incremental targets are more appropriate for regular progress monitoring, with zero harm targets reserved for aspirational goals [ 26 ].
The use of a detailed indicator report complementing a summary indicator table was found at case studies with a more mature and comprehensive approach to dashboard reporting. The value of this approach has been noted in recent literature [ 50 ]. Longer term trends portrayed in graphs in these more detailed reports allow ready identification of data patterns and are better at identifying variation for some indicators [ 54 ]. Similarly, the use of data disaggregated at clinical area level is useful as complication rates vary by speciality and aggregated data can hide underperformance in specific program areas [ 4 ]. The use of clinical area, or even clinician level comparative data, may however be limited in smaller hospitals by smaller sample sizes. The presentation of longer-term trends, the use of process control charts, disaggregated data and commentary analysing data and identifying actions are useful formats in highlighting unacceptable variation in dashboards.
The study demonstrated greater variation in the types and content of stand-alone reports, than dashboards. The findings from both incident and externally generated patient experience reports show diverse approaches to data use, identification of variation and actions. Case studies varied in using data to provide assurance only on compliance indicators to more sophisticated methods of detecting and analysing healthcare quality variation to support a quality improvement approach. This finding is echoed in the research of Jones et al. [ 46 ] who found higher performing boards use data for quality improvement, rather than assurance.
This study highlights the importance of carefully selecting data and reports to inform an evaluation of healthcare quality. While selecting and endorsing data used to inform healthcare quality evaluation is a key board process identified in the literature [ 7 , 11 , 55 , 56 ] the literature has largely been silent on how this happens. This study found developing a data reporting framework was an important process in identifying the types of data needed, either in standalone reports or in indicator dashboards. A reporting framework can, through referencing quality dimensions, make apparent the need to identify a broad range of data to inform the task of evaluating healthcare quality [ 57 , 58 ]. Additional healthcare quality governance tasks, such as oversight of quality priorities, can also be reflected in a reporting framework as shown in Table 6 . Board and committee calendars can then be generated from the framework, with the addition of any other specific governance tasks as described in charters or terms of reference.
The disparity in approach to evaluating healthcare quality at cases, reflects the extent to which a thoughtful and mature governance approach to data selection, data analysis and monitoring action was undertaken. Case studies seeking information to provide insight into system level issues and action to inform quality improvement, engaged in a number of additional processes not previously discussed in the literature.
Literature descriptions of the task of overseeing healthcare quality priorities have a focus on boards establishing strategic goals for quality [ 1 , 3 , 7 , 8 , 9 , 12 , 59 ]. Processes of cascading priorities throughout the organisation [ 15 , 60 ] and monitoring strategic progress [ 1 , 61 ] receive less attention. While additional processes were found that supported this task in this study (see Table 5 ), there was generally low engagement in all quality priority oversight processes.
Planning processes commonly incorporate elements of both planned, deliberate priorities and emergent priorities formed in response to newly identified risks or opportunities [ 62 , 63 ]. The case studies used broad strategic priorities to accommodate the abundance of quality priorities arising from various regulatory bodies. The multitude of external priorities creates ‘priority thickets’ [ 2 ] from which services struggle to find space for internally planned strategic quality priorities. The articulation of broad strategies can therefore be seen as an astute management strategy to keep options open to accommodate emergent external priorities [ 62 ]. However, the need for more specific strategic healthcare quality priorities, to set a clear direction throughout the hospital, was apparent from interviewees.
Most case studies demonstrated an understanding of the need for healthcare quality priorities as evidenced by their presence in strategic plans. However, moving beyond symbolic acknowledgement and cascading specific planned priorities or elevating internal emergent priorities into quality planning mechanisms overseen by the governing body was not apparent in most case studies. This finding reflects the research of Demb [ 64 ] who found that boards are less involved in strategy oversight when organisations are more focussed on emergent external priorities, than planned internal strategies. The need for specific quality priorities visible at the board level is also consistent with that of Jones et al. [ 46 ] who found that oversight of both planned and emergent strategies is a feature of higher performing boards.
In addition to processes directly related to the two healthcare governance tasks, this study identified a set of governance processes that supported effective leadership and governance. This finding is similar to that of Cornforth [ 65 ] who, in a survey of UK charity boards, found that having the right skills, a clear understanding of roles and responsibilities, and board and management that periodically review how they work together, were key factors in explaining variance in board effectiveness.
This paper has identified a range of processes that support the enactment of key tasks in governing healthcare quality. Healthcare quality governance work can now be redefined in terms of these processes (see Table 5 ). This builds on previous research which identified a limited number of processes. When case studies are compared based on their participation in commonly cited processes, their level of engagement is broadly similar as show in Table 7 .
This is consistent with the findings of Freeman et al. [ 66 ] who found that commonly cited governance processes are not useful for discriminating between hospitals. The frequency with which most case studies undertake these processes reflects a form of institutional isomorphism. Mimetic institutional isomorphism is characterised by organisations dealing with uncertainty by adopting pre-existing processes used by peers perceived to be high performing [ 67 ]. In much the same way that healthcare boards historically adopted models of governance from the commercial world with the accompanying focus on financial accountability, there has been a similar isomorphism in the area of healthcare quality governance. This has led to a focus on a narrow range of governance processes that have been highlighted in literature and guidelines. These common processes have lost their discriminatory power in evaluating engagement in healthcare quality activities. They do not adequately represent the range of processes that boards need to engage with to effectively enact tasks related to healthcare quality governance responsibilities. The adoption of additional processes, demonstrated at some case studies, represent more mature, and at times innovative, governance approaches. The devolved corporate governance model of hospital governance relies on the assumption that boards and management understand the work of governance. This study indicates that this is not always the case and that taskwork processes need to be clearly articulated in legislation, regulation and guidelines.
Examining the work of boards and senior managers, via qualitative methods in this study, has made visible additional important processes in relation to two key tasks of healthcare quality governance, evaluating healthcare quality and overseeing quality priorities as well as broader governance processes that support a more mature response to executing key governance responsibilities. This finding makes clear that it is not just engagement with taskwork that is important, but the quality of that engagement. Effective engagement is predicated on how well the various processes, comprising a task, are undertaken.
This paper presents a comprehensive examination of the work of governing healthcare quality in key areas. Data from documents, interviews and observations has been reviewed from eight public hospitals in Australia to identify a range of processes related to two key tasks. The focus on dashboard reporting processes alone in much of the existing literature is not warranted as dashboard data is a small and less variable component of healthcare quality data reported at the corporate governance level. Summary indicator tables found in dashboards were supplemented, in some case studies, with more useful detailed indicator reports and stand-alone reports using a range of formats to identify variation and action. Processes of overseeing quality priorities were underutilised by all case studies and reflect the dominant influence of external quality priorities in setting the agenda in hospitals.
While comprehensive data was collected related to two tasks of healthcare quality governance there are at least two other tasks that require similar exploration including promoting leadership and culture, and ensuring effective quality systems. Further in-depth examination of these tasks would provide evidence of additional processes of healthcare quality governance. This study demonstrates that previous research into taskwork processes, undertaken internationally, while relevant to the Australian context, does not go far enough in describing detailed processes related to taskwork. While valuable data was obtained, in this study, on additional processes it would be useful to undertake further research in different countries to confirm and expand on the current findings.
This study highlights that engagement in taskwork is variable and this can impact on how well healthcare quality governance is enacted. Reporting on a few quality indicators related to performance agreements can provide assurance on compliance requirements. This differs from engagement in a multitude of processes that ensure a range of appropriate data is selected and reported in a format that is easily understood and informs the evaluation of healthcare quality at the corporate governance level. This finding is reflected in recommendations arising from the inquiry into failings at the Mid-Staffordshire Hospital which include the need for careful selection of quality data and the establishment of norms so that poor performance can be identified [ 6 ]. Similarly, the presence of quality priorities in a strategic plan does not necessarily ensure their translation into measurable strategies that are cascaded through the organisation and monitored for progress.
When key processes are omitted, the rituals of governance may appear to be satisfied but the responsibility to effectively govern healthcare quality may not be met. Boards and managers need to differentiate between common approaches to governance and effective engagement in a range of taskwork processes that enable the fulfilment of governance responsibilities. The findings from this study provide practical guidance to governing bodies in the execution of two key tasks of healthcare quality governance. Enactment of these healthcare quality tasks is aided by engagement with a set of broader governance processes to ensure the effective working of boards and committees.
Availability of data and materials
The data analysed during the current study are not publicly available due to ethical confidentiality requirements. Requests for summary de-identified data can be made to the corresponding author.
Board Quality Committee
Local Hospital Network
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The author would like to acknowledge the valuable guidance of Professor Helen Dickinson and Professor Margaret Kelaher in providing doctoral supervision.
The research was supported by an Australian Postgraduate Award. The funder had no role in the design of the study and collection, analysis, and interpretation of data and in writing the manuscript.
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Brown, A. Understanding corporate governance of healthcare quality: a comparative case study of eight Australian public hospitals. BMC Health Serv Res 19 , 725 (2019). https://doi.org/10.1186/s12913-019-4593-0
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DOI : https://doi.org/10.1186/s12913-019-4593-0
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Corporate Governance Case Study: Tesla, Twitter, and the Good Weed
Justin Slane, Sharon Makower and Joe Green are editors for the Capital Markets & Corporate Governance Service at Thomson Reuters Practical Law. This post is based on a Practical Law article by Mr. Slane, Ms. Makower and Mr. Green.
Perhaps no company in the world has the perception of its brand being tied to one person more than Tesla Inc. (Tesla) and its CEO and now former chairman of the board, Elon Musk. As at least one journalist phrased it, “ Elon Musk is Tesla. Tesla is Elon Musk .” And Musk is not just the face of Tesla, but a co-founder of PayPal and Solar City, the founder and current CEO of SpaceX and founder of its subsidiary, The Boring Company. He has crafted a “real-life Iron Man” persona, including all the eccentricity, and is undoubtedly one of the most recognizable and polarizing CEOs in the world.
But 2018 has not been the best year for Elon Musk. In what Musk would call negative propaganda pushed by short sellers, Tesla has faced heightened scrutiny and increasingly negative media attention related to a litany of issues, including cash burn , vehicle safety , production capabilities , and a string of employment-related lawsuits and executive exits ( only made worse recently ). Analysts and investors began to publicly cool on Tesla and question its long-term value, which Musk also attributed to short sellers .
In May, citing independence concerns and questioning whether Musk may be stretched too thin, proxy advisory giants Glass, Lewis & Company (Glass Lewis) and Institutional Shareholder Services, Inc. (ISS) opposed the re-election of current Tesla board members and supported splitting Musk’s roles as CEO and chairman.
As the pressure mounted, Musk became increasingly combative, especially on Twitter, lashing out at short sellers and anyone criticizing Tesla or him. Musk’s erratic behavior and obsession with short sellers and critics drew more criticism of his leadership and that of Tesla’s board of directors .
But it all came to a head on August 7, when in the middle of the trading day, without notice or warning to anyone (including other executives and directors at Tesla or contacts at Nasdaq, the exchange on which Tesla’s common stock is listed), Musk tweeted:
Then, for reasons still unknown, nobody took his phone away, and Musk continued tweeting and interacting with shareholders throughout the day:
The public reaction to Musk’s tweets was strong and immediate. Tesla’s stock soared before Nasdaq eventually halted trading for several hours later in the day, and there was instant speculation about whether Musk actually had the funding to take Tesla private (spoiler: he did not).
Musk’s drastic departure from normal public disclosure standards and the subsequent media circus arising from it unsurprisingly captured the attention of the Securities and Exchange Commission (SEC), which ultimately resulted in an enforcement action and settlement with Elon Musk over the tweets. Tesla also settled with the SEC. The end results of the settlements include the following:
- Musk must step down as chairman of the board and be replaced by an independent chairman, but Musk will be allowed to remain as CEO. On November 7, 2018, Tesla appointed an independent chairman.
- Musk and Tesla must each pay $20 million in fines.
- Tesla must add two independent directors and create a formal disclosure committee to oversee communications from Musk.
- Tesla must hire an experienced securities lawyer, subject to approval by the SEC Division of Enforcement (Tesla’s current general counsel was Elon Musk’s divorce attorney and worked primarily in family law before joining Tesla).
This post examines this corporate governance cautionary tale, focusing primarily on the Regulation FD (Reg FD) issues raised by Musk’s tweets and public statements. The full article from which this post is excerpted also examines a host of other issues including disclosure controls and procedures, stock exchange requirements, conflicts of interest, board independence, and more, highlighting for each issue where things went wrong and identifying resources that perhaps could have helped avoid this type of mess. To learn more about these issues, the full article can be accessed here .
Complying with Regulation FD
Much of the initial reporting surrounding Musk’s tweets questioned whether the use of his personal Twitter account violated Reg FD. Reg FD, which took effect in 2000, prohibits selective disclosure by requiring that material nonpublic information disclosed to securityholders or market professionals (including research analysts) must also be disclosed to the public in a broad, non-exclusionary manner. And in fact, in finally answering why he tweeted about taking Tesla private, Musk explained in an August 13 blog post that he wanted to have discussions with key shareholders and he felt it “wouldn’t be right to share information about going private with just [Tesla’s] largest investors.” While Musk’s intentions are noble and in line with the basic principle of nearly 20-year-old federal securities law, the reports were correct that Reg FD generally requires more than tweets.
SEC guidance issued in 2008 and 2013 regarding the use of company websites and social media for disclosure suggests that companies can still satisfy Reg FD requirements if they notify investors of where they can expect material information to be disclosed online, making it a “recognized channel of distribution.” In particular, the 2013 guidance dealt with the Netflix CEO disclosing monthly viewing hours on his personal Facebook page.
The SEC stated that disclosing material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD because it is not likely a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” that Reg FD requires. The SEC stated this is true even if “the individual in question has a large number of subscribers, friends or other social media contacts, so that the information is likely to reach a broader audience over time.”
The SEC used its 2013 guidance to highlight the concept that whether a Regulation FD violation occurred will turn on whether the investing public was alerted to the channels of distribution a company will use to disseminate material information. The SEC’s 2008 guidance on the use of company websites outlines the factors that indicate whether a particular channel (whether it be a corporate website or a corporate executive’s social media account) is a recognized channel of distribution for communicating with investors.
In this case, Tesla and Musk had a few factors in their favor:
- A Form 8-K filed on November 5, 2013 , encourages investors to follow Elon Musk’s personal Twitter account for material information being disclosed to the public. Ideally the notice would be repeated, including in Tesla’s annual reports on Form 10-K or additional Form 8-K reports, but at least some form of notice was provided to shareholders.
- Elon Musk also has nearly 23 million Twitter followers. His original tweet was widely picked up and further broadcast by major news sources within minutes, and within hours, former SEC Chairman Harvey Pitt was on major cable news networks discussing whether Musk committed securities fraud.
While it was far from a safe use of social media for Reg FD purposes, Musk and Tesla appear to have a decent argument that shareholders had notice that information could be disclosed through Musk’s personal Twitter account and his account was reasonably designed to provide broad, non-exclusionary disclosure of the information.
Most public companies typically adopt formal policies regarding compliance with Reg FD (as well as the use of social media by their employees and executives). A strong Reg FD policy should contain:
- A complete outline of the procedures and practices of the company concerning disclosure of information to the public.
- A formal limitation on which company personnel are permitted to communicate with analysts and securityholders on behalf of the company. These people should be well-versed in Reg FD and familiar with the company’s public disclosures. Ideally these people should also understand the concept of materiality and what may constitute securities fraud under Rule 10b-5.
- A restatement of the company’s policy on confidentiality of information.
- A guide to disclosing material information.
Companies should also address the use of social media by their employees and executives, whether in their Reg FD policies or in separate social media guidelines that cover both personal social media use and social media use as an authorized company spokesperson.
While a Tesla Reg FD policy, set of social media guidelines, or other corporate communications policy addressing these concerns does not seem to be publicly available, the Tesla Code of Business Conduct and Ethics (last revised in December 2017) refers to a “Communication Policy … [that covers] Tesla’s social media guidelines, media relations and marketing guidelines, and the circumstances and the extent to which individuals are allowed to speak on Tesla’s behalf.” Musk should have been aware of Tesla’s communications policy, ideally having been reminded frequently through regular training for Tesla officers regarding the company’s policy and their obligations under Regulation FD, and never tweeted to begin with.
Twitter Was Always a Bad Choice
Musk’s tweets are also an extreme, yet useful, example of why casual social media use and disclosure of material nonpublic information should not be mixed. Section 10(b) of the Exchange Act prohibits material misstatements and omissions of fact, and companies must always avoid making disclosures in informal social media posts that lack material information or the context necessary for investors to be fully informed. If a company decides that there is material information that should be disclosed to the public, it must then determine when that information must be disclosed. Information should only be disclosed when it is definitive, accurate, clear, and specific.
Twitter can be an excellent tool for supplementing more formal corporate disclosure, such as linking to SEC filings, the company’s website, or attaching a press release as an image. However, individual Twitter posts as the sole medium of disclosure might be the worst form of social media use for disclosing material nonpublic information. The primary differentiating factor between Twitter and other social media platforms is it limits user posts to just 280 characters. Musk used 61 characters in his original going private tweet (if you pro rate his $20 million SEC fine to the characters in that tweet, Musk spent over $2.6 million on spaces alone). While some may applaud his succinctness, Musk’s August 7 tweets and blog post are textbook examples of public disclosures that lack context and completeness.
What does “funding secured” and “investor support is confirmed” mean? Who is/are the buyer(s)? How was the $420 per share price calculated? Has the board received or approved a proposal? None of these basic questions had answers. We later learned in the SEC’s civil complaint against Musk:
- A Tesla investor texted Musk’s chief of staff “What’s Elon’s tweet about? Can’t make any sense of it….”
- A reporter emailed Musk to ask if his tweet was a 420 joke and whether “an actual explanation” was coming.
- The following investor relations exchange happened in real life seven hours, ten tweets, and one blog post after Musk’s initial “going private” tweet:
“After Tesla’s head of Investor Relations received another inquiry from another investment bank research analyst at approximately 7:20 PM EDT, he asked whether the analyst had read Tesla’s ‘official blog post on this topic.’ The analyst responded, ‘I did. Nothing on funding though?’ The head of Investor Relations replied, ‘The very first tweet simply mentioned ‘Funding secured’ which means there is a firm offer. Elon did not disclose details of who the buyer is.’ The analyst then asked, ‘Firm offer means there is a commitment letter or is this a verbal agreement?’ The head of Investor Relations responded, ‘I actually don’t know, but I would assume that given we went full-on public with this, the offer is as firm as it gets.'” (see SEC Complaint, par. 52 .)
It took six full days before Musk or Tesla provided any clarification about what Musk meant by “funding secured” and the rest of his going private tweets on August 7.
Corporate Disclosure or Personal Statements?
Musk’s claim he was making statements in his personal capacity as a potential buyer of Tesla as opposed to on Tesla’s behalf as CEO and Chairman adds another element to this case illustrating why disclosure of material nonpublic information requires full context. If his personal Twitter account is both a recognized channel for corporate communications and a means for him to make disclosures as a private individual, how are investors supposed to know what is corporate information and what is personal?
Nothing in the August 7 tweets or blog post definitively stated Musk was not speaking on behalf of Tesla as its CEO and Chairman. In fact, in the investor relations exchange mentioned above, Tesla’s head of Investor Relations says “… I would assume that given we went full-on public with this…” (emphasis added), phrasing that certainly implies he thought the statements were made on Tesla’s behalf.
It is generally good corporate governance practice that if a company discovers a Reg FD violation, to minimize risks, it should promptly disclose the information by a Reg FD-compliant method. For example, if an executive officer selectively discloses material nonpublic information, the company can correct the situation by filing a Form 8-K to disclose the information.
Given the potential confusion for investors resulting from Musk’s initial tweets and his claim that he made the statements in his “personal capacity,” Tesla should have immediately filed a Form 8-K (which also happens to allow for more than 280 characters) to correct any potentially selective or misleading disclosure made by Musk and provide any additional context necessary. No Form 8-K was filed though. Again, it was six days before Musk or Tesla provided any clarification or additional explanation for his statements on August 7.
The SEC Settlement and Ongoing Fallout
The ultimate fallout from Musk’s brief foray into a possible going private transaction is still ongoing:
- Class action lawsuits are still pending.
- The Department of Justice is still investigating Musk’s tweets.
- Significant investors are engaging with Tesla requesting changes to the board of directors (and other corporate governance practices).
Musk doesn’t seem to be fazed by any of this, and could do something tomorrow that turns this all on its head again. But the SEC settlement with Musk has now been approved by the Southern District of New York, and Tesla has settled separately with the SEC without a formal enforcement action. The terms of the settlements bring us full circle to where the year started, with the recognition that Tesla was facing an increasing battle between responsible corporate governance and Elon Musk’s persona. Tesla lost this round. If the added disclosure controls and expanded board continues losing battles, well, who knows? There is always Teslaquilla (or maybe not )!
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Corporate Governance – A Case Study of Tesco Accounting Scandal 2014
Disclaimer: This is not a sample of our professional work. The paper has been produced by a student. You can view samples of our work here . Opinions, suggestions, recommendations and results in this piece are those of the author and should not be taken as our company views.
Type of Academic Paper – Essay
Academic Subject – Governance
Word Count – 1700 words
In present times, the subject of corporate governance is the most crucial one and a large number of corporate scams have recently been reported. This is due to a lack of attention paid by the board of directors, auditors, and other regulatory bodies, making it problematic for shareholders and stakeholders of a company to think strategically for the betterment of the company.
According to Bebchuk, Cohen, and Ferrell (2008, p.783), corporate governance is defined as the set of rules and regulations, and practices that can be implied on the company so as to control the business operations. The corporate governance of a company is mainly concerned with maintaining a balance between the company operations and the interests of stakeholders and shareholders of a company (Bhagat and Bolton, 2008, p.257).
However, there are recent additions in the corporate governance scams amongst which the accounting scandal of Tesco PLC 2014-2015 is the most prominent one. The aforementioned UK retailing business came under the regulatory scanner because of the scandal of overstating the profits of the company; where nearly around £263 million worth of profits were overstated (TheGuardian.com, 2014).
This essay highlights the lack of corporate governance while exploring major loopholes in the corporate structure of the company which resulted in this major accounting scandal. A conclusion is presented in the end while summarising major findings of the essay and effective recommendations are presented in this essay for the companies to avoid such corporate governance failures in the future.
Overview of the case
In the year 2014, Tesco, UK’s largest retailing giant, was plunged deeper into the crises which resulted in the suspension of four senior executive directors of the company. The suspension was followed by the scandal of overstating the company profits by £250m (TheGuardian.com, 2014). Tesco had overstated the first-half profits of the company to be £1.1bn, but later on, it was revealed that the company had experienced a profit of £263m. This overstatement of the profits in the forecasted profit figures was to attract shareholders and to increase investments and funds to the retailer (FinancialTimes.com, 2014).
After the accounting scandal in Tesco PLC, the legal authorities and board of directors significantly took this matter under consideration and wiped off £2bn of the net value from the UK’s biggest retailing company. Following the accounting fraud, Tesco PLC was alleged to pay a £500m fine by the end of the year and more than 125 investors filed against the accounting fraud made by Tesco PLC and claimed that the company had been lying to gain funds and investments (TheTelegraph.co.uk, 2014).
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Failure of Corporate Governance
Tesco PLC has been known for its corporate governance framework and its commitment to safety and ethics towards the environment as well as the people. However, the accounting scandal of Tesco PLC in 2014 has been reported to be one of the influential events that declined the overall reputation of the company. Because of this corporate governance failure, several people of the company were suspended including four executives as well that were engaged in the accounting fraud (Awolowo, 2016, p.23).
Moreover, the audit committee and company (Deloitte) were also reviewed and brought under the consideration after the incident. The major corporate governance failure, in this case, is because of the massive process failure of Tesco PLC. More importantly, the resignation of the Chief Finance Office just before the accounting scandal brought the headlines left the company with no CFO (TheTelegraph.co.uk, 2014).
Additionally, the resignation of the CFO followed with the resignation of several other great senior executives which is the case of pure poor corporate governance. The board of directors and the non-executive directors paid no attention to the inflated and overstatement of profits to grab the attention of shareholders.
Similarly, the external audit committee, PwC, and the internal audit committee of the company were equally responsible for their lack of activeness in this matter. However, the EU Audit Directive and Code of Ethics pose a strong push on the internal audit committees of the company, including their role on financing, reporting, and disclosing of honest information to the shareholders and stakeholders of the company (Müller, 2015).
It is evident that the role of the board of directors to have vigilant corporate governance is the prominent one which implies that in order to establish excellent corporate governance, it is necessary that the company board of directors are the key players in maintaining effective corporate governance (Bhagat and Bolton, 2008).
The Board of directors of the company is responsible to establish the key vision and mission of the company while setting strategies to obtain a nominal position in the market (Woods, 2007). However, this is not in the case of Tesco PLC. The board of directors was ignoring the Code of Ethics and EU Audit Directives which led to accounting fraud. Moreover, the board of directors of the company failed to take strategic decisions and raise their voice against the irregularities while focusing their recognition on revenue generation.
According to Ismail (2017), the UK Code of Governance provides provisions for the audit committees as well which ensures that the audit committee of the company is responsible for maintaining integrity in the financial statements of the company, along with reviewing the financial controls, judgments, and operations of the company so as to avoid the mishaps or misstatements in the financial statements.
However, in the case of Tesco PLC, the audit company of the company PwC paid no attention to the misstatement hence this led to the removal of PwC from the external audit committee of Tesco PLC (Müller, 2015). According to Courteau et al. (2017, p.1), the internal and external audit committee of the company is responsible to manage the financial activities such as reporting, external and internal audit, disclosure, and monitoring the regulatory operations of the financials of the company.
However, the audit committee of Tesco PLC has long been avoiding their responsibilities which resulted in the accounting scandal of Tesco PLC in 2014. According to Kukreja and Gupta (2016), the disqualification or resignation of the potential board members also results in the failure of corporate governance. This may be in the case of Tesco PLC. The accounting scandal in 2014 broke out soon before the resignation of the CFO of the company and left Tesco with no supervision of the CFO, however, the scandal led to the dismissal of three responsible board members which included the chairman, Richard Broadbent, and CEO Phillip Clarke as well.
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Corporate governance – a theoretical perspective.
In the light of stakeholder theory, corporate governance can be seen as the collection of policies and principles that are necessary to maintain the morals and ethics of conducting a business while valuing the stakeholders and their interests. According to Courteau et al. (2017, p.1), stakeholders theory is known for its managerial side and declares that the company and the board of directors are responsible to value the interests of the stakeholders while valuing the morals and ethics of conducting the business (Alpaslan, Green and Mitroff, 2009).
In the case of Tesco PLC, the company has failed to value the stakeholders’ interests during the governance process. The board of directors failed to value the interest of their shareholders while disclosing the fake information and overstated the company profits to gin investments and profits from the investors. Similarly, the company audit committee of Tesco PLC also paid no attention to the values of its stakeholders which led to the fraud (TheGuardian.com, 2014).
The weak corporate governance structure of Tesco PLC and no attention to the overstatement of profits results in such fraud which not only penalizes the company with extra charges, but it also affects the overall market reputation of the company in the eyes of the shareholders and customers. Because of the accounting fraud of Tesco PLC, it has been evident that the internal and external board of directors of the company are responsible to make strategic decisions for the avoidance of such mishaps in the reporting or disclosure of financial statements (Kukreja and Gupta, 2016).
Moreover, it is also recommended that the company must be including effective regulations and viable accounting practices so as to avoid such fraud. Similarly, good leadership and governing practices should also be incorporated within the corporate governance of the company in order to keep the employees on track to meet organisational goals while meeting and valuing the stakeholders’ interests and legal rights. If the corporate structure and board of directors of Tesco PLC could have valued the stakeholders’ values and concerns while keeping the personal gains for the company aside, the company might not have indulged in such serious accounting fraud.
As a concluding statement, it has been observed that Tesco PLC has been known for its misstatement of profits in accounting books to grab the attention and investments of the shareholders to increase profits. This has occurred because of a weak corporate governance structure and a lack of attention from the board of directors and audit committee to this issue. Hence it can be recommended that the company should have an effective corporate governance structure with the inclusion of Governance Code provisions and potential board members in order to avoid such frauds and scandals.
- Abdullah, H. and Valentine, B., 2009. Fundamental and ethics theories of corporate governance. Middle Eastern Finance and Economics , 4 (4), pp.88-96.
- Alpaslan, C.M., Green, S.E. and Mitroff, I.I., 2009. Corporate governance in the context of crises: Towards a stakeholder theory of crisis management. Journal of contingencies and crisis management , 17 (1), pp.38-49.
- Awolowo, I.F., 2016. Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting. system , 7 (10), p.23.
- Bebchuk, L., Cohen, A. and Ferrell, A., 2008. What matters in corporate governance?. The Review of financial studies , 22 (2), pp.783-827.
- Bhagat, S. and Bolton, B., 2008. Corporate governance and firm performance. Journal of corporate finance , 14 (3), pp.257-273.
- Courteau, L., Di Pietra, R., Giudici, P. and Melis, A., 2017. The role and effect of controlling shareholders in corporate governance. Journal of Management & Governance , pp.1-12.
- FinancialTimes.com, 2014. Available at: https://www.ft.com/content/71118e80-4a20-11e4-bc07-00144feab7de
- Ismail, I.N., 2017. The Roles of Corporate Governance and its Influances on Risk and Performance: Tesco Plc.
- Kukreja, G. and Gupta, S., 2016. Tesco Accounting Misstatements: Myopic Ideologies Overshadowing Larger Organisational Interests. SDMIMD Journal of Management , 7 (1), pp.9-18.
- Müller, M., 2015. Critical Analysis Of The Financing Policies of Tesco plc.
- TheGuardian.com, 2014. Available at: https://www.theguardian.com/business/live/2014/sep/22/tesco-launches-inquiry-after-overstating-profit-forecasts-by-250m-business-live
- TheTelegraph.co.uk, 2014. Available at: http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11181686/Tesco-crisis-what-you-need-to-know.html
- Woods, M., 2007. Linking risk management to strategic controls: a case study of Tesco plc. International Journal of Risk Assessment and Management , 7 (8), pp.1074-1088.
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Corporate governance: an introduction
Examines the origins, aims and framework of corporate governance as it exists in the UK
On this page
Introduction, what is corporate governance, bribery and fraud, modern slavery and supply chain issues, role and composition of the board, role of the chair, role of the directors, role of the committees, useful contacts and further reading, explore our related content.
Good corporate governance is about effectively supervising the management of a company to uphold the company’s integrity, achieve more open and rigorous procedures and ensure legal compliance. Ultimately it should also promote good relations with stakeholders, including shareholders and employees. Since the UK Corporate Governance Code was created, corporate governance has evolved to reflect changing stakeholder priorities. Most recently, concerns have been about making sure leadership teams and boards have oversight of corporate culture, and are engaging with their stakeholders, including employees. Executive pay and a lack of diversity on boards and in top leadership teams are also key issues in corporate governance.
This factsheet explores the purpose of corporate governance, the regulations that reinforce it, and best practice as specified by the Code. It also looks at the roles and responsibilities of the board members as well as the audit, remuneration and nomination sub-committees.
See the full A-Z list of all CIPD factsheets .
Explore our viewpoint on corporate governance and transparent reporting . See our report 'How do companies report on their ‘most important asset?' for an analysis of workforce reporting in the FTSE100 and how to establish better quality reporting practices.
Corporate governance is necessary for the effective, entrepreneurial and prudent management that can deliver the long-term success of an organisation.
Effective governance involves supervising the management of a company, managing risks and identifying opportunity, so that business is done competently, with integrity and with due regard to the interests of all stakeholders. It embraces regulation, structure, good practice and board ability.
In the UK, the Companies Act 2006 is the overarching legislation which sets out the legal requirements for corporate decision making, and the consequences of getting it wrong.
The UK Corporate Governance Code (the Code) sets out standard of good practice aims to achieve more open and rigorous procedures. The Financial Reporting Council (FRC) monitors the Code and publishes an annual report on it's impact and implementation.
All companies with a premium listing of equity shares in the UK are required to explain in their annual report and accounts how they have applied the principles and whether they have complied with the provisions – a ‘comply or explain’ approach. The Code represents the best practice of corporate governance in the UK. Other kinds of companies (such as AIM-listed or private companies) may follow other codes, such as the QCA code (for smaller companies) or the Wates Corporate Governance Principles (for large private companies). .
The Code provides a guide to key components of effective board practice. In 2018 it was refreshed, to place greater emphasis on relationships between companies, shareholders and stakeholders, and to promote the importance of establishing corporate culture that is aligned with business purpose, strategy, promotes integrity and values diversity.
The principles of the Code are:
- Board leadership and company purpose : every company should have an effective and entrepreneurial board which is collectively responsible for the long term, sustainable success of the company. The board should establish the company’s purpose, values and strategy.
- Division of responsibilities : the board should have the appropriate combination of executive and independent non-executive directors, with a clear division of responsibilities between leadership of the board (the chair) and the executive leadership of the company.
- Composition, succession and evaluation : the board should have the appropriate balance of skills, experience and knowledge. They should be appointed and evaluated in a formal and transparent way.
- Audit, risk and internal control : the board should present a fair, balanced and understandable assessment of the company's position and prospects, and establish formal and transparent polices to ensure external and internal audit, and risk management are effective.
- Remuneration : executive directors' remuneration should aim to promote the long-term sustainable success of the company, and be aligned to purpose and values.
The Code also includes a new requirement that boards demonstrate how the organisation is improving employee voice at board level. Organisations are now required to illustrate how they’re applying one or more of the below models:
- Giving a non-executive director responsibility over workforce issues
- Establishing a workforce director (so-called 'worker on the board')
- Establishing an employee advisory committee (or broader stakeholder committee).
The updated (2018) Code also includes:
- Mandatory requirements for the reporting of pay ratios between chief executives and workers, include justification of the difference in pay
- Requirements for directors of all large organisations to set out how they are acting in the interests of employees and shareholders.
- A public register of listed companies that have faced significant shareholder opposition to executive pay packages.
- A new requirement that the Remuneration Committee review pay across the wider workforce, and illustrate how employees have been engaged throughout the process. They must also illustrate how internal and external measures are being used to measure the appropriateness of executive pay.
Corporate governance is important as it helps to foster cooperation internally and promote the image of the company to its stakeholders and the public. Since its introduction, the Code has contributed to an improved framework in the UK which promotes ethical business practices and responsible business . Our Hidden figures report looks at how organisations in the UK FTSE 100 are reporting on their people practices.
Read our Remuneration Committee report to see how companies can adopt the new requirements for Remuneration, and ensure effective governance of people, culture and pay.
The Bribery Act 2010 brought together various pieces of law relating to bribery. It introduced four offences, including the corporate offence, which occurs when an organisation fails to stop people operating on its behalf from being involved in bribery. Organisations, led by the directors, are recommended to:
- Name a person responsible for all anti-bribery actions.
- Promote anti-bribery culture.
- Have a clear anti-bribery policy .
- Develop clear financial controls for large financial transactions.
- Train staff on anti-bribery to enable the correct actions when issue arise.
- Ensure an effective whistleblowing system is in place.
- Make clear the gifts and hospitality protocol.
- Specific clauses relating to anti-bribery and fraud should be included in contracts where appropriate.
- Detailed risk assessments and evaluations should be undertaken to highlight issues and learn from issues that may have occurred.
The Modern Slavery Act 2015 introduced a new requirement for companies, including those carrying out charitable, educational or public functions, with an annual turnover worldwide of £36 million or more, supplying goods or services in the UK (estimated to amount to 12,000 organisations), to publish a yearly statement setting out what they have done (or not done) in the previous 12 months to prevent slavery and forced labour practices in their own businesses and supply chains.
The statement, signed by a board director, must be published prominently on the company’s website as soon as possible, and no later than six months (according to Home Office guidance ) after the organisation’s financial year end. The Modern Slavery Registry carries over 7,000 statements from nearly 6,000 companies made under the UK legislation.
A government report on how well the Act is working is due out in 2019. The government intends to publish a list of non-compliant organisations after that date.
The CIPD’s modern slavery statement is on our governance webpage .
Directors have a collective responsibility to promote the long term sustainable success of the company and are individually responsible for their actions. There are civil consequences if a director breaches any of the duties. The duties are enforceable by:
- Damages or compensation for the loss suffered by the company.
- Restoration of company’s property.
- An account of profits made by the director.
- Cancelling a contract, if the director failed to disclose their interest.
A failure by a director to declare their interest in an existing transaction or arrangement is an offence and may give rise to a fine.
A key issue for boards is how they incorporate diverse skills, experience, backgrounds and perspectives into their decision making. Gender and ethnicity balance at board level have both been recognised by government and are tracked by the FTSE Women Leaders Review and the Parker Review . Other kinds of diversity are also increasing in importance, including age, skills and experience, cognitive diversity and disability.
Public and voluntary sector boards
Boards of directors also exist in the public, charity, health and voluntary sectors. Though the aims of these organisations are very different from those of commercial companies they still require the same management and accountability in the form of robust corporate governance.
Public sector bodies, such as the Cabinet Office , have produced guidance and case studies on corporate governance issues for public sector boards and for people wishing to take up public appointments.
The boards of voluntary or charitable organisations play a similar role to those in the public and private sectors. The positions are often unpaid but that does not mean that they are not as important. The National Council for Voluntary Organisations has produced guidance and advice on trustee and governance issues. Many charities and voluntary organisations follow the Charity Governance Code.
Composition of the board
The size and complexity of the organisation will usually determine the size of the board. In a small company the board may consist of just the managing director (MD) and one other, often the financial officer. In larger organisations it could comprise the chair, chief executive, chief financial officer, other executive directors (EDs) and non-executive directors (NEDs). The Code recommends that the board include a balance of executive and non-executive directors, including independent non-executive directors.
The role of the chair is to lead and manage the board, to be responsible for setting the board's agenda and to ensure that meetings are conducted properly, order is kept, the agenda is followed, items are discussed and decisions made. The Code recommends that the chair should be responsible for the leadership of the board and for ensuring effectiveness in all aspects of its role.
The chair is appointed in accordance with the articles of the company. The chair has a crucial role in ensuring that the executive directors and non-executive directors work together with a common purpose, using their different skills and competences, and promoting openness and debate. The Cadbury Review likened the role of the chair to that of an orchestra conductor – striking a balance between focused discussion and general debate for the overall effectiveness of the board.
The Code recommends that the chair should be independent and a chief executive should not go on to be chair of the company.
The executive directors (EDs) will run the company's business and will often be directors of functions such as finance, HR or operations. Much has been written on which functions should be represented at board level and it is for each organisation to decide the composition of its board. However, EDs with certain titles should be aware that they will need to have the required specialist knowledge to carry out those roles.
Non-executive directors (NEDs) have the same duty of care as EDs. So before taking up any director appointment, it's vital to undertake a personal 'due diligence' to understand the company and the expectations placed on NEDs.
The board may decide to delegate some of its authority to committees. The committees usually established are:
- Audit committee.
- Nomination committee.
- Remuneration committee.
- Ad hoc/special committees with delegated responsibility for a specific task or part of board activity. Common examples include risk, people and culture, sustainability, or responsible business.
Each committee will have terms of reference and will normally report back to the board at agreed intervals.
The governing principles for audit committees in the Code are based on the conclusions and recommendations of the Smith Report. The Code recommends that at least one member of the audit committee should have recent and relevant financial experience. The FRC's Guidance on Audit Committees gives more detail.
The nomination committee leads the process for new board appointments, ensures plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. Once the recruitment and selection process is complete the committee will recommend new appointments to the board.
The remuneration committee sets the remuneration and policies for the EDs and the board chair, and considers fair pay and pay reporting across the organisation. They should review workforce remuneration and related policies, alignment of incentives and rewards with culture. The Code recommends that only NEDs should sit on the committee. We’re exploring the future of the remuneration committee in light of the broader requirements on this committee to include workforce pay.
Institute of Directors website - briefings on corporate governance (some briefings are available to IOD members only)
Acas – Bribery
GOV.UK – Modern slavery
Books and reports
CHARTERED INSTITUTE OF PERSONNEL AND DEVELOPMENT. (2016) A duty to care? Evidence of the importance of organisational culture to effective governance and leadership . London: CIPD.
SIMPSON, J. and TAYLOR, J.R. (2013) Corporate governance, ethics and CSR . London: Kogan Page
TRICKER, B. (2019) Corporate governance: principles, policies and practices . Oxford: OUP.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
CLARK, E. (2017) Employment practices are a key plank of good corporate governance . People Management (online). 15 November.
OZANNE, S. (2018) Modern slavery act: why corporate accountability is set to rise . People Management (online). 17 October.
ROPER, J. (2019) Can HR measure up? HR Magazine . November. pp16-23. Reviewed in In a Nutshell, issue 93 .
ROPER, J. (2020) Rethinking corporate governance after Covid-19 . People Management (online). 4 June.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Ben Willmott: Head of Public Policy, CIPD
Ben leads the CIPD’s Public Policy team, which works to inform and shape debate, government policy and legislation. His particular research and policy areas of interest include employment relations, employee engagement and well-being, absence and stress management, and leadership and management capability.
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BOARDROOM BEST PRACTICES
Good Corporate Governance Practices and Examples
Lakshna Rathod | April 4, 2019
The new 2018 UK Corporate Governance Code, released on 16 July 2018 by the Financial Reporting Council (FRC), puts emphasis on new areas of corporate governance: boardroom diversity – with an especial emphasis on getting more women on boards – remuneration, board effectiveness and board composition are some of the key areas requiring change.
Yet, at many UK companies, these corporate governance principles have already been applied.
“This update to the Code, along with the addition of the concept of company purpose, greater emphasis on culture and broad diversity in many ways embeds and spreads good practice that already exists in some companies,” comments Ernst & Young in a recent article.
We look at the areas in which these new corporate governance principles are being applied, and the examples of good practice in UK corporate governance.
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Good Corporate Governance Practice for Remuneration
FRC guidance on good governance for remuneration addresses an area that has been controversial in the UK for some years. At 18 listed companies, shareholders voted against the pay package proposals made by their boards.
The FRC proposes in the 2018 Corporate Governance Code:
- More demanding criteria for remuneration policies and practices.
- Clearer reporting on remuneration, how it delivers on company strategy, long-term success and its alignment with workforce remuneration.
- Directors exercising independent judgement and discretion on remuneration outcomes, taking account of wider circumstances.
The issues at stake are matching remuneration to performance, and doing it transparently, so that shareholders can perceive the benefit and vote its approval.
A good example of how this can be done at best-practice standards comes from the London-based exhibitions organiser, ITE Group , which is listed on the London Stock Exchange (LSE).
ITE Group’s board is seeking to substantially increase performance-based pay for its top executives over the next three years, during which time the board’s Transformation and Growth strategy will be implemented. “The enhanced awards are intended to provide a material incentive to management to focus on driving performance over this period. As the proposed grant levels are significantly higher than the awards made in previous years, shareholders will need to be satisfied with the award size, the rationale provided and with the stretch of the performance targets,” according to a company statement.
What is notable here is the clear explanation of remuneration decisions, along with the appeal to the shareholders – all of this just as the FRC lays out in the new Code.
10 Corporate Governance Examples:
- Executive Managers and board of directors maintaining an organization compliance culture
- Board’s succession planning to include board diversity
- Remuneration committees must follow best practice standards and criteria for corporate governance
- Boards must ensure internal auditing controls are in place and in agreement with stakeholders
- Reducing the cost of capital by implementing good corporate governance practices
- Non-Executive and Directors board members must have assured independence with proposals
- Decision disclosure and transparency demonstrated by the renumeration committees
- Managing and identifying the invested interests of stakeholders in the organization.
- Clear corporate governance strategic planning within a strong governance framework
- Adapt to evolving market conditions by attracting talented directors
Corporate Governance Code Says More Women on Boards
The new Corporate Governance Code places great emphasis on boardroom diversity, with particular attention to increasing the number of women on boards.
According to a 2018 report by the University of Exeter , considerable progress has been made in increasing the diversity of UK boards. In 2017, women made up 27.7 per cent, on average, of FTSE 100 boards, up from 12.5 per cent in 2010. (This had reached 29.0 per cent by July 2018.)
“However, there is evidence that momentum has tailed off and progress on increasing female representation at the top of companies has stalled,” the report complains.
Apparently, male resistance to this kind of good governance continues on UK boards. The UK government backed Hampton-Alexander review records some of the worst explanations given by the Chairs and CEOs of FTSE 350 companies for not appointing women to their boards – “e.g., ‘women don’t fit’, ‘all the good ones have already gone’ or ‘most women don’t want the hassle.’”https://www.gov.uk/government/news/revealed-the-worst-explanations-for-not-appointing-women-to-ftse-company-boards
A good example of best-practice governance in this area is the Weir Group , an engineering firm – one of the few tech companies in the UK with a firm policy of helping women shatter the glass ceiling – 27 per cent of the board are women, and so are 29 per cent of the executives.
Weir was cited by former Business Secretary Vince Cable as one of the best employers in the category of promotion of women.
“Although Weir operates within industries which are traditionally dominated by men, we are committed to making Weir a more diverse and inclusive workplace and we will continue to deliver opportunities for women to develop their careers. By
2020 we have committed to ensuring that 1/3 of the Board, the Group Executive[s] and their direct reports will be female, In addition the Board will annually review our progress against gender pay D&I initiatives,” explains Chief People Officer Rosemary McGinness in a statement .
Corporate Governance Best Practice and Board Effectiveness
Board effectiveness is one of the key principles of the new UK Corporate Governance Code.
“Boards need to think deeply about the way in which they carry out their role. The behaviours that they display, individually as directors and collectively as the board, set the tone from the top. The Code places considerable emphasis on decision-making and outcomes.”
De la Rue , the British manufacturer of banknotes and passports, won a corporate governance award from World Finance magazine in 2018. De la Rue is distinguished for its effective board, which external evaluation again validated last year.
“At De La Rue, the Board continues to work closely with the executive management team and offers support and robust challenge as appropriate. All Directors play an active role in overseeing management of the business. The Board agenda will continue to balance the need to improve oversight and governance of all aspects of the business with the ability to debate and examine forward looking strategy, including changes to the business environment and markets in which we operate and compete,” the annual Corporate Governance report notes .
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Corporate Governance Best Practice in Board Composition
The new Code places strong emphasis on board composition.
“Appointing directors who are able to make a positive contribution is one of the key elements of board effectiveness. Directors will be more likely to make good decisions and maximise the opportunities for the company’s success if the right skillsets and a breadth of perspectives are present in the boardroom. Non-executive directors should possess a range of critical skills of value to the board and relevant to the challenges and opportunities facing the company.”
UK mining and resources giant BHP provides a good example of corporate governance principles are being applied. “As you would expect, Board composition continues to be a topic of discussion during meetings with shareholders. Investors – like the Board – believe that regular refreshment is important, but they are also aware of the value that corporate memory brings to a board,” Chairman Ken Mackenzie points out in a recent speech.
“As part of ongoing planning for Non-executive Director succession, the Board has maintained a skills matrix for several years. Following a review of Board succession planning, the Board has refreshed its approach. The requirements for Board composition are now framed with an overarching statement, and the desired skills and experience included in our updated matrix. The overarching statement, skills, experience and attributes take into account, and respond to, the changing external environment and BHP’s core business characteristics.
The Board has 10 members, including the CEO. I am a proponent of a relatively small Board. However, for a company like BHP, which has four key Board committees (with the Sustainability Committee being critically important in our industry), a Board size of 10 to 12 is appropriate. As of 30 June, the average tenure of Directors was five years and two months. BHP has an aspiration to achieve gender balance across our workforce – and on our Board – by FY2025, and Board diversity remains a focus.”
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With Diligent Boards, on-the-go directors will have more than a board portal at their fingertips. From a single sign-on (even for those who sit on multiple boards), they’ll be able to work across devices (with real-time syncing) to: stay current with committee meetings and materials; communicate and annotate documents in tandem with other users and get notifications for updates; easily search archives and board resources; complete board assessment questionnaires ; and submit their votes and signatures any time of the day or night, from anywhere in the world, from their smartphone, tablet or laptop.
As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond, with the ability to select the products they need that help them perform their best and work within their allotted budgets.
The Governance Cloud ecosystem of products includes:
- Diligent Boards
- Conflict of Interest forms (pre-filled forms)
- Board Assessment Tools
- Resolutions and voting
- Diligent Messenger
- Diligent Minutes
- Insights (curated content and videos)
- Entity Management
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What went wrong at BritishVolt?
By dominic alston on feb 15, 2023.
This is the story of the rise and fall of BritishVolt, and a case study of bad governance.
In response to the ever-worsening and ever-present threat of the climate crisis, the UK Government in 2020 promised to ban the manufacturing and sale of new petrol and diesel cars in the UK by 2030. This flagship policy would be essential to Britain meeting its 2050 net zero goals , as transport makes up 24% of total emissions, of which 91% is produced by road vehicles, according to Government figures.
Naturally, batteries are a critical element of this electric transition – and in turn, the production of vehicles is vital to the UK economy at large. Eight hundred thousand cars and 1.6 million engines were made in the UK in 2021, of which 80% were exported, making up 10% of all exports and hundreds of thousands of jobs directly and indirectly.
To ensure the resilience of this industry while preparing for the 2030 Internal Combustion Engine (ICE) ban, domestic battery production had to ramp up – and fast. The Faraday Institute calculates that there will need to be five UK-based gigafactories by 2030, each producing 20GWh per year of batteries. There is currently just one.
The jewel in the crown
The jewel in the crown of the UK EV industry, and therefore all the future car industry, would be BritishVolt – a company founded by Swedes Orral Nadjari and Lars Carlstrom. Since its launch, it had amassed nearly $2.5 billion in promised funds – including £100 million from the government and preliminary deals to supply batteries to Aston Martin and Lotus.
The jewel has faded. The company fell into administration in late January 2023, just four years since its formation and nine months since it unveiled the Northumberland’ gigafactory’. It is worth just £32m – over 90% less than in 2022.
BritishVolt’s demise was not down to one single factor – but rather a myriad of failures in governance and leadership. Due to the centrality of batteries to the future of global decarbonisation, and Brexit tariffs making the import of batteries unsustainable, this isn’t just another story of a single company failing. The failure of BritishVolt threatens Britain’s position as the third-largest tech ecosystem and global leader in decarbonisation.
However, this was not inevitable. Across the pond, the Inflation Reduction Act exemplifies effective industrial policy. At home, the government’s stewardship of the steel industry shows it can be done here too, but it begs the question, why steel over electric batteries? Ultimately, the decision to favour steel rather than future-proof the car industry will be yet another mistake in this story.
Read more: How good governance prevents corruption
Too fast, too soon
As stated, there are many reasons for BritishVolt’s failure. The first is the timeline of events. David Bailey, professor of business economics at Birmingham Business School in the UK, commented that they “hadn’t secured all the funding needed to build out the factory for about £3.8 billion. And they didn’t have any big customers” initially.
After the company announced its costly factory, the government promised £100 million due to its alignment with the much-discussed and little-acted-upon’ levelling up’ strategy. Only after this funding was pledged did the first customers arrive – Lotus and Aston Martin, and the big investors, which through five funding rounds, invested $2.4 billion.
Lotus only sold 1,710 cars in 2021, and Aston Martin 6000. Assuming that by 2030 these will all have to be electric, we start to see why things didn’t add up. At 30 gigawatt hours, the promised factory would have been big enough to make hundreds of thousands of batteries a year.
By 2022, things weren’t looking good. The company had a £3 million a month payroll and, in October, announced it needed £200 million in emergency funding to last until the summer of 2023 when it expected to receive its first orders from vehicle manufacturers. The government rejected a request for an early helping hand of £30 million.
The two founders flew around in private jets. They spent money they didn’t have – and not just on huge factories. The company leased a £2.8 million mansion for executives to stay in while visiting the site. Each staff member was given a £900 computer monitor. Budgets were not managed like a startup looking to scale but an established, profit-generating company.
BritishVolt didn’t have the customers to promise such a project or such an expensive payroll. Poor governance was central here: lofty aims and over-ambitions aims should have been restricted from the start, which is a significant responsibility for the board.
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Consulting fees and the old boy’s network
The second factor here is due to consulting. The startup paid Ernest and Young (EY) £500,000 a month for advisory and consulting services, according to two staff, which at one point, was more than they paid all employees.
EY and BritishVolt were too close for comfort. Its chief financial officer, its head of finance systems and innovation, and the chief of staff to its chief executive were all hired from the consultancy in 2021.
You’d be right to wonder if it’s sensible to have someone who profits from your failure be the same person you pay to help you succeed. To make matters worse, who oversaw BritishVolt’s insolvency and administration? You guessed it: EY.
Read more: How to manage conflict with a CEO
Wrong men for the right job
In general, the company was managed like a startup rather than a massive industrial project – by entrepreneurs rather than industrialists. David Bailey commented that they “didn’t have a track record in technology development” – or, more specifically, electric vehicle or battery manufacturing.
To make matters worse, they didn’t have a particularly good legal track record either. In December 2020, founder Lars Carlstrom stood down after hearing that the PA news agency would publish details of his past. He was sentenced to eight months in prison and given a four-year trading ban for tax fraud in the late 1990s, which a higher court later reduced to a conditional sentence and 60 hours of community service. Later, he was also accused of acting negligently by Sweden’s tax authority over a separate unpaid tax bill for one of his companies in 2011.
In August 2022, Orral Nadjari, the other co-founder, also stepped down.
One has to ask if these two were the right people, with the right experience, to be put into such a position.
Read more: Directors beware. Limited liability may not protect you
A tale of two industries
Unlike Britain’s shambolic approach to supporting the EV industry, one industrial policy is essential to decarbonisation and looks, at least for now, like a success. The companies running the UK’s four remaining steel blast furnaces have been offered £600 million to ditch carbon-intensive smelting methods that use coal and adopt electric arc furnaces. This can be totally carbon neutral.
It is also understood that any government support would be conditional on the companies also committing to investing in the plants themselves and will be tied to investments in other areas of environmental improvements, so it complies with state aid rules.
Questions remain – and critics say it is not nearly enough to save the industry, which has been declining for decades. Although the exact figures may be insufficient, the strategy is a sound one. It invests in incentivising decarbonisation while incentivising further investment from the companies themselves – both generally and on other improvements to sustainability. This is holistic and rational.
The approach to BritishVolt didn’t share such qualities. The government did not do enough to fully support the company to ensure it reaches a stage at which it could display value to investors while also not letting the hand of the market choose the perfect suitor. The latter would have been effective if the industry at large was supported – by tax incentives open to anyone looking to produce batteries in the UK.
This begs the question – why would the government choose steel over electric cars? Why was £600 million available to steel firms but not producers of electric vehicles, batteries, or components? Of course, the steel industry already existed, so it is not quite the same, but as electric cars are the flourishing industry of the future, and British steel has been on life support for quite some time, it does show a severe case of misplaced priorities.
Read more: What is green hushing?
A tale of two countries
If you’d like to see an example of good, rational, effective industrial policy, then look no further than the Inflation Reduction Act, Biden’s flagship policy passed in the US in 2022. By combining a ban on the sale of new ICE engines by 2035, the finish line was set, and to help America get there, both consumers and manufacturers were incentivised to go green.
If people want a discount on purchasing their electric car, they’d have to choose a vehicle with a certain percentage of its components and battery elements sourced from either the US or a free trade partner. If the manufacturer wanted that boost to sales, they’d have to produce said cars on US (or an ally’s) soil. Effectively, this supercharges America’s car industry while reducing its climate impact.
Some critics say it is stuck awkwardly in the middle. It will be hard for the US to find so many elements and components from domestic (or allied) producers, which will then impact the incentives available to consumers, reducing the Act’s climate credentials.
This may be true, however, it is promising legislation, both future-proofing American industry while boosting it – all while making it affordable to American consumers. It also encourages other countries to seek free trade agreements with the US.
However, Britain has not been so cunning – and currently, there is nothing to encourage consumers to buy British electric cars or manufacturers to make them here. Brexit has made the importing of batteries uncompetitive, so without domestic production or unlikely trade agreements, UK-made electric vehicles will not be competitive compared to America’s or China’s established industries.
To make matters worse, the Inflation Reduction Act will incentivise manufacturers to make batteries and cars on US soil instead of the UK. That is if EV manufacturers don’t head to Eastern Europe to benefit from the low-cost, skilled, and EU-adjacent economies there.
Read more: Are big companies just fooling people with climate policies?
Lessons in governance
There are some critical implications for governance and lessons to be learned.
For governments, they shouldn’t pick individual winners from an entire industry; and they should either fully commit to supporting said winners or let market forces decide.
They shouldn’t have expected to revolutionise an entire industry or even get a gigafactory up and running in just a few short years, and if they want to become a global leader in science and tech, then keeping up with global investment in Research and Development would undoubtedly have helped.
For businesses and board members, this debacle shows why you shouldn’t use the same consultancy service for both consulting and managing administration; why you should keep ambitions forever rooted in possibility; why you should only spend the money you have; and why those at the top must be the right men for the job.
Read more: Study for a university credit-rated, industry approved, globally recognised qualification in corporate governance.
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Related posts, what is freedom of information, and does it apply to my company, more roles for women on boards is great, but what about the c-suite, corporate executives will pay for white-collar crimes in us pilot programme.
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Corporate governance from the inside out
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This article explains that effective corporate governance has both internal and external drivers.
Introduction, agency theory, the stewardship concept, the separation of ownership and control, the legal and professional framework, corporate governance, principles or rules-based codes of corporate governance, corporate governance and cultural values.
Although directors and managers of companies may have little influence over the external regulatory framework, they can and must play their part in ensuring effective internal governance and compliance from deep within their own organisations.
This should extend beyond external financial reporting and corporate governance structures into more operational areas of business management. By promoting deep-rooted corporate governance ideals within their own organisations, a culture of stakeholder focus, and individual and corporate responsibility, for the common good, can flourish.
This article first briefly introduces agency theory and the agency problem, which recognises that the interests of the shareholders and of the board of directors may sometimes conflict and how issues relating to this problem brought about the need for corporate governance codes in the first place. It then examines the traditional stewardship concept that underlies conventional corporate governance within an external financial reporting framework.
The article then compares ‘rules’ versus ‘principles’ based codes and the implementation of governance within organisations. It argues that a broader and longer-term view of agency theory, such as applies to a wider group of stakeholders can engender a better team spirit that will help promote a culture of pro-stakeholder behaviour and positive attitudes at all levels of the organisation. The important links between corporate governance and corporate culture and values are also highlighted.
Under the narrowest of perspectives the principal objective of a company has traditionally been to maximise profits and thereby add to the wealth of its shareholders. However, the degree to which the pursuit of profit and wealth dominates depends upon the society's view of ‘agency theory’. The questions to ask are; who discharges responsibility; who is accountable and what particular structure of relationships and potential conflicts exist between ‘principals’ and their ‘agents’.
In business the stakeholder is known as the ‘principal’ and the officers of the company or the directors are known as the ‘agents’. The extent to which boards of directors act in the interests of shareholders and in the pursuit of fiduciary interests such as wealth maximisation is determined by which of the seven perspectives is taken on corporate social responsibility; Gray, Owen and Adams (1996).
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Generally it is accepted that the rights of shareholders and other stakeholders connected with the company should be protected and promoted by ‘stewards’ of these stakeholders and their interests, Argenti (1997) and Campbell (1997).
In theory, agents should be held responsible and accountable for balancing the conflicting interests of a whole range of stakeholders of the company.
The traditional ‘pristine capitalist’ view of ‘stewardship’ implies that the rights of the shareholders and the pursuit of their wealth are of paramount importance (Sternberg 1998). However, the banking crisis and spectacular corporate failures such as Enron and World Com would indicate that even the narrower interests of owners can often be neglected or ignored, along with those of a much wider group of stakeholders, including the general public.
The introduction of the limited company as a legal entity was a great advance from the private solely owned business or the partnership in that it greatly increased the supply of long-term funds to industry and commerce and contributed to the creation of far more wealth within the global economy. The concepts of shareholdings and limited liability encouraged many more people of moderate means to invest their disposable income in businesses and at much lower risk than would hitherto have been possible within unincorporated organisations. With many more investors, many of whom have little or no business acumen, came the need to divorce ownership and control for practical purposes, and to introduce a ‘court’ or board of directors, as the ‘agents’ of this disparate group. This is the basis of what became the public limited company, a separation of ownership and control. This is a normal arrangement these days and it is hardly ever questioned.
‘The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of a company…’
Adam Smith (1776), p408
The separation of ownership and control, and the disparity and inexperience of shareholders in business and financial matters, as Adam Smith recognised, would be problematic unless some system of external governance was imposed to safeguard the interests of these owners. The separation of ownership and control, and the potential divergence of the interests of owners and managers, is the main reason why there is a need for a system of corporate governance.
Adam Smith also recognised the problem of the separation of control and ownership interests within companies:
‘….The directors of such companies, however, being the managers rather of other peoples money rather than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company’ Adam Smith (1776), p408
Clearly it was recognised as long ago as 1776 that the ‘agency’ model within the corporate context would not naturally work to the advantage of the principals without some intervention.
Successive Companies Acts throughout the world from 1844 in the UK, have laid down increasingly complex layers of legislation about the constitution, the format, the minimum disclosure requirements, about the use of reserves, the maintenance of capital, and the general protection of creditors. In addition there has been a legal requirement for an ‘independent’ external audit of the financial disclosures of a company’s affairs on a periodic basis to be carried out by competent and qualified professionals.
One of the major responsibilities of company directors is to ensure that the financial reports of companies are relevant and faithfully represent the affairs of the company and that stakeholders can make rational decisions based on the qualitative characteristics of the reports that are published (they are a ‘true and fair’ representation of the state of the company’s finances at a given point in time). Auditing is mainly concerned with the faithful representation aspect of financial information.
Companies in most countries are by law required to have their accounts audited at the end of every financial period. A major aspect of most external corporate governance codes is about ensuring that the role of the auditor is effective and the relationship between the auditors and directors has integrity and is independent and objective. The issues to consider here are who should appoint the auditors, how long should the same firm of auditors be used repeatedly, and should firms of auditors, or even their subsidiaries or associates be providing consulting services to their clients?
Corporate governance can be seen as having internal and external sources, where external corporate governance consists of mandatory and voluntary codes, reports and frameworks such as company law, stock market listing rules and accounting and auditing standards. Internal corporate governance is how such external governance is complied with and embedded within the culture and values of the organisation and how sound governance is implemented and works in practice.
The corporate governance framework can play its part in providing a structure for governing the behaviour of companies and their officers, but external rules, regulations, and codes of practice are not effective unless a climate of compliance within organisations is promoted to support such structures and mechanisms at all levels through such mechanisms as corporate and ethical codes of behaviour and values. There also needs to be a deeper culture embedded within companies, recognising the responsibilities and duties of management with regard to the legitimate rights of their stakeholders and shareholders.
Effective corporate governance is about promoting this climate of transparency, scepticism and objectivity; by creating systems, procedures, and internal structures, aimed at complying with external requirements, but also pre-empting and dissuading anti-stakeholder behaviour from deep within the organisation. Internal corporate governance (or the corporate culture) should therefore be instrumental in reducing the ‘expectations gap’ between the interests and motivations of the ‘agent’ and those of the ‘principal’; thereby addressing the agency problem at all levels within the organisation.
Corporate governance structures can be voluntarily complied with and any departures from best practice can be explained in the notes to the accounts. The main benefit of this ‘principles based’ approach is that full compliance is often difficult for companies in specific situations or in special circumstances. ‘Rules-based’ compliance is a ‘one size fits all’ (box ticking) approach where full compliance is required by law and where departures can entail legal sanctions. This approach, such as adopted in the USA, is felt to be more effective because it doesn’t rely as heavily on the integrity of the boards of directors to interpret and comply or explain openly and objectively.
Corporate governance is based on voluntary control in many countries, such as in the UK and is often a requirement for stock exchange listing. It is based on the adoption of specific board sub-committees and structures with clear recommendations relating to sound internal financial and operational controls and the promotion of high quality financial information to strengthen the accountability of boards of directors to their shareholders.
The Cadbury Code, (1992) was designed to concentrate on the essential internal control mechanisms to support this need for greater transparency and accountability to shareholders, which at the time was felt to be deficient. This voluntary report highlighted the ways in which companies could better underpin a company’s legal and regulatory obligations to its shareholders through accountability and control, viewing the role of the non-executive director (NED) as being critical from an independence perspective.
The recommendations of the Cadbury Report emphasised higher standards of corporate governance through improvements in the quality of financial reporting. This aspect has also been supported by accounting standards bodies nationally and internationally, striving to provide more consistency, relevance, and understandability within the process of accounting for financial transactions and for reporting income, assets and liabilities. The Cadbury report (1992) and others, were eventually enforced as listing rules on many stock exchanges.
The Cadbury Report recommended that external auditing should be more independent and closely monitored through the introduction of audit committees composed of a minimum number of non-executive directors (NEDs). However, where corporate governance was to have most impact was through the introduction of robust internal control mechanisms and a system of internal audit where the design and control of processes and continuous monitoring of transactions and decision-making can help safeguard assets and prevent and detect anti-stakeholder behaviour within the organisation. The concept of internal control was to be based on promoting continuous vigilance by management in preventing financial loss through fraud, error, inefficiency or incompetence.
There are many corporate governance codes, published around the world focusing on such matters as the role of the boards of directors and on how they are constituted. These include various recommendations on the procedures to appoint directors, the qualifications of directors, the proportion and independence and effectiveness of non-executive directors (Higgs 2003) and their diversity (Tyson 2003), and on the need for additional and independent board committees such as audit (Smith 2008), nomination, risk and remuneration committees. Indeed many corporate scandals (pre-Enron) tended to revolve around inappropriate or unjustified pay increases or bonuses for executives, seemingly regardless of performance, leading to so called ‘fat cat’ scandals. Both the Greenbury Report (1995), and the Hampel Report (1998), have focused their attention on directors' remuneration, rather than upon broader and more significant financial, performance or governance issues, because it was seen as being such a problem.
The main recommendations of the above committees were subsequently incorporated by the Turnbull Committee into the original Combined Code of the Committee on Corporate Governance in 1999, but this code also emphasised the broader responsibility of companies with respect to safeguarding shareholders’ interests.
‘The board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets’ Principle D.2 – Combined Code May 1999
The combined code has been revised since 1999, and in 2010 it included several new recommendations. Eventually various versions of the UK Corporate Governance Code were published (FRC, 2014). These various iterations of the combined codes include the requirement for the company chairman to be re-elected annually and to encourage greater diversity (specifically gender diversity) of the board. The revised code also requires more emphasis on the board of directors’ performance in the larger companies being independently reviewed on a regular basis. It requires disclosure of the business model and responsibilities relating to risk; such as how much risk the company can accept and how much it will need to avoid, reduce or transfer. These new requirements link well with new proposals for a broader corporate reporting framework relating to integrated reporting <IR> (IIRC, 2013).
The revised combined code also makes new recommendations about the need to align remuneration of directors to longer-term performance metrics and having a closer interface between non-executive directors and the executive directors. The changes also include the chairman’s responsibility relating to identifying the training and development needs of directors and around more effective external communications with shareholders, including institutional investors.
More effective company law, listing rules, regulations, accounting and auditing standards and corporate governance codes have clearly provided a better structure and basis for the governance of companies' behaviour in relation to the original agency problem. Whether these governance structures are principles or rules-based, the essential agency problem still seems to remain, as highlighted by continuing evidence of director failings and further corporate failures.
Reliance on voluntary codes, professional standards, and even on legislation may not provide an adequate safeguard against governance failure unless boards of directors, on behalf of stakeholders, set a clear ‘tone from the top’ and actively create a culture of transparency, honesty, and integrity within their organisations at all levels.
For corporate governance to be effective and for the interests of stakeholders to be properly safeguarded, a climate should be created where those working for the stakeholders and on behalf of them, are conscious of the ultimate economic, social and ethical consequences of their decisions and behaviour (at whatever level).
Directors should therefore promulgate and inculcate within their organisations a climate of responsibility, accountability, and transparency. This can be achieved by the use of formal structures such as audit and remuneration committees, by appointing effective and independent non-executive directors, and by tightening up on auditing regulations, but it is mainly achieved by having a sustainable, longer-term and broader perspective and by encouraging all to act ethically.
Companies can encourage such behaviour by designing appropriate corporate codes of ethics and behaviour within organisations, supported by a system of cultural values which are themselves linked to individual performance appraisal and professional development.
For example, promoting consonance between the aims of primary stakeholders and those of other stakeholders can create a team spirit where all perceive they are working for a common purpose or goal. This common purpose can also be reinforced by having a clear corporate mission and setting strategic aims and objectives which are coherent and sustainable and which can be broken down into meaningful and measurable departmental and team objectives that all within the organisation can buy into and relate to.
This kind of climate is promoted by such instruments as:
- equitable productivity and bonus schemes
- transparent recruitment and promotion policies
- good staff welfare and reward systems
- effective environmental policies, and
- good customer relations.
All of these are based on an overriding quality culture, where effectiveness and efficiency are promoted and every aspect of the organisations activities are considered to be important at all levels, where people of all levels are valued and respected and where the impact of all decisions on the interests of stakeholders is always recognised and anticipated.
Good governance therefore must, by implication, extend beyond basic compliance with external reporting and auditing requirements, to such areas as internal control, performance measurement and management, budgetary control systems, quality management, staff recruitment, training and development, and to reward and promotion systems within a business organisation.
A business that embraces the underlying principles as well as ‘being seen’ to be compliant with corporate governance codes is better placed to protect the interests of its stakeholders, including the public interest, from a more sustainable and longer-term perspective.
This wider view of agency theory is in stark contrast to the narrower ‘stewardship’ perspective, but whichever perspective is taken, corporate governance and all it entails is an essential framework within which the rights, responsibilities, and rewards available to the principals and their agents is best balanced.
The development of an informal corporate culture and of ethical values to underpin and support formal corporate governance structures is essential. This approach reduces the risk of negative behaviours such as, wastefulness, inefficiency, idleness, greed, fraud, deception, bribery or theft occurring or being tolerated.
Such a business culture can sustainably meet and balance the needs of shareholders, lenders, employees, suppliers, customers, and the general public, recognising their respective interests as being entirely compatible over the longer term.
This balance can only be realistically achieved if effective acceptance of corporate social responsibility, rather than compliance with governance structures alone, becomes part of the ‘mindset’ of all those working in business organisations; so that accountability and responsibility to all stakeholders is delivered from the inside out.
- Argenti, J (1997) Stakeholders: The Case Against Long Range Planning, 30(3), 442-445
- Cadbury Committee, (1992), Report of the Committee on the Financial aspects of Corporate Governance, London, Gee
- Campbell A, (1997), Stakeholders: The Case in Favour of Long Range Planning. Long Range Planning, International Journal of Strategic Management, (30)3, 446-449
- Financial Reporting Council (2010), Revisions to the UK Corporate Governance Code UK (formerly the Combined Code), FRC
- Financial Reporting Council (2014), UK Corporate Governance Code , FRC
- Gray, R., Owen, D. and Adams, C. (1996) Accounting and Accountability; Changes and Challenges in Corporate Social and Environmental Reporting, Harlow: Prentice Hall Europe
- Greenbury Committee, (1995), ‘ Directors’ Remuneration – Report of a Study Group ’, chaired by Sir Richard Greenbury
- Hampel Committee, (1998), Committee on Corporate Governance – Final Report, London, Gee
- Higgs (2003), ‘ Review of the Role and Effectiveness of Non-executive Directors ’
- IIRC, ‘The International <IR> Framework’ (Dec 2013), published by the IIRC
- Smith A, (1776), ‘ An Inquiry into the Nature and Causes of the Wealth of Nations ’, Feedbooks
- Smith Committee (2008), Consultation on Proposed Changes to Guidance on Audit Committees, (The Smith Guidance)
- Sternberg, E (1998) Corporate Governance: Accountability in the Marketplace, Hobart, Paper 137, Institute of Economic Affairs
- Turnbull Committee, (1998), Combined Code – Principles of Good Governance and Code of Best Practice
- Turnbull Committee, (1999), Internal Control – Guidance for Directors on the Combined Code
- Tyson Report (2003)
Adapted and updated for SBL from an article originally written by a member of the P1 examining team
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Author: Alison Dillon Kibirige
Digital versions PDF Download Buy £44.95
Published: August 2021 | ISBN: 9781860728242
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Designed for those on the journey to becoming a Chartered Governance Professional, our Corporate Governance study text provides the knowledge and skills necessary for a company secretary or governance professional to act as chief adviser to the board and other stakeholders and as the facilitator for systematic application of good governance practices.
It covers the general principles of governance both within the UK and internationally and discusses a variety of subjects surrounding the board such as roles and responsibilities, conflicts of interests, performance evaluation and risk management. Accountability and social responsibility are covered along with how to manage relations with shareholders and the remuneration of senior staff.
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- Definitions and issues in corporate governance
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Authors: Douglas Armour, Santhie Goundar, Kelly Padwick, Lee Roach Price: £44.95 | Digital | July 2021
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- Corporate Governance in the UK
Corporate Governance in the UK - Case Study Example
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Extract of sample "Corporate Governance in the UK"
Generally, the paper 'Corporate Governance in the UK" is a good example of a management case study. Corporate governance is referred to as the system of rules, practices, and processes through which a corporate organization is directed and controlled; a system by which firms are directed and controlled. In each and every corporation, a governance structure specifies the allocation and distribution of rights together with responsibilities as applied to different stakeholders in the corporation including the board of directors, shareholders, managers, regulators, creditors, and other stakeholders. Corporate governance is tasked with the responsibility of specifying the rules and procedures for decision making in corporate affairs. Important to note, corporate governance provides a framework through which the company’s objectives are achieved and obtained, it encompasses the entire management sphere including action plans together with internal controls, performance management as well as corporate disclosure.
Corporate governance came into play after various scandals and fraud that had perverted different corporate organizations was discovered. For instance, the introduction and enactment of the Sarbanes-Oxley Act in the US were particularly formulated in 2002 to restore public confidence in corporate societies and markets specifically after some high profile companies such as WorldCom and Enron were involved in fraud, which rendered them bankrupt. Companies across the globe strive to have levels of corporate governance to acquire and retain a good public image, which on the other hand enhances the company’s performance and overall profitability. Companies usually achieve good corporate citizenship by not only being environmentally aware but also demonstrating high ethical standards together with sound corporate governance practices. This paper critically evaluates the effectiveness of the systems of corporate governance in the UK. In essence, the paper using Barclays Bank Corporate Governance provides a critical review of corporate governance in the UK together with the effectiveness of systems of corporate governance in the UK.
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- > The Business Case for Corporate Governance
- > Introduction
- List of contributors
- 1 The role of the board
- 2 The role of the Chairman
- 3 The role of the non-executive director
- 4 The role of the Company Secretary
- 5 The role of the shareholder
- 6 The role of the regulator
- 7 Directors’ duties
- 8 What sanctions are necessary?
- 9 Regulatory trends and their impact on corporate governance
- 10 Corporate governance and performance: the missing links
- 11 Is the UK model working?
Published online by Cambridge University Press: 23 June 2009
This book is not intended to be another handbook or primer on corporate governance. Although readers will find chapters, such as those by Charles Mayo and Stilpon Nestor, that describe recent developments in laws and regulations, the main purpose of the book is to describe corporate governance in practice from the viewpoints of the principal players, including the board of directors, the regulator and the investor. Contributors have focused on the benefits of good governance and a number have written about events and their own experiences that demonstrate governance in action: both positive and negative examples.
I hope that the book will appeal not only to lawyers but also to those working in listed companies. Those who are directors may identify with the views of Sir Geoffrey Owen and many of the Chairmen I interviewed who believe that boards are becoming more professional. The role of director, whether executive or non-executive, can no longer be considered simply as a promotion for a successful senior manager or a reward for doing a good job running another business. Being a director is a job in its own right that demands specific skills and individual qualities. Aspiring directors will gain an appreciation of the value of good governance for their business and should understand the importance of high-performance effective boards for corporate success. Colin Melvin and Hans-Christoph Hirt from Hermes Investment Management have written about the academic and professional studies that show that good governance leads to improved corporate performance.
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- By Ken Rushton , Former Director of Listing Financial Services Authority and Company Secretary ICI
- Edited by Ken Rushton
- Book: The Business Case for Corporate Governance
- Online publication: 23 June 2009
- Chapter DOI: https://doi.org/10.1017/CBO9780511494819.001
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