Published: 17 Oct 2017

CQI and IoD value operational governance as a cornerstone in measuring the success of boards

With organisations such as Uber, Sports Direct, Bell Pottinger, Ryanair and Kids Company all making headlines for the wrong reasons, everyone agrees that corporate governance is important. But how do you measure it?

That’s the challenge facing the CQI and the Institute of Directors (IoD), which have worked together on this year’s Good Governance Report, published on 10 October.

The report, now in its third year, ranks the UK’s largest listed companies on 47 indicators such as how effectively their board operates, their relations with their shareholders and stakeholders, and whether they have ISO 9000 certification. Topping this year’s list are drinks giant Diageo, insurance company Aviva and engineering business GKN.

This year, the CQI worked closely with the IoD to introduce new measures reflecting operational governance – in other words, how the intent of a company’s board is translated into action.

Estelle Clark, CQI’s executive director of policy, said the way the index is calculated has changed “considerably” this year to focus on “how an organisation actually behaves: what it does rather than what it says.”

She adds: “Many of the new indicators move from measuring whether a policy or commitment exists, to measuring whether a policy or commitment is delivered.”

For example, the score now takes into account data from corporate governance researcher RepRisk on whether companies are working towards the UN’s sustainable development goals – and not just whether they have signed up to those goals.

With sound operational governance, Clark said, “the organisation understands what the board wants, delivers what the board wants, remedies any deviation from what the board wants and feeds back to the board that all these things have happened”.

CQI board member Mike Turner pointed to the CQI’s Competency Framework as an example of how “the quality profession as a whole is working hard to deliver value to boards by assuring boards that things are actually happening in the way they expect them to happen, and actually reflect intent”.

The CQI is also working closely with the standards body ISO to develop the first international standard for organisational governance.

IoD board member Dr Suzy Walton said there should “absolutely” be more focus on operational governance in the Good Governance Index in future, “if it can be measured”.

She adds: “The problem that the advisory board have is what can we measure. There has to be information publicly available on all the companies that we’re looking at. That’s the debate we have every year.”

Jonathan Knight, COO of Board Intelligence and a member of the advisory panel for the index, agreed, saying: “One of the things we’d like to push for next year, is what other metrics and what other things should be publicly available? What transparency can we push for that will actually measure board effectiveness?”

Next year, the IoD and the CQI hope to take the index beyond the FTSE 100 and look at smaller listed businesses, or different types of organisations. “We’ve started a debate and now we need to be brave and take it into different fields,” said Walton.

Clark said: “We must now extend the debate into the FTSE 250, into private companies and even public sector organisations and SMEs.”

She noted that the results showed no correlation between company size and effective corporate governance, suggesting that smaller companies have just as good a chance of performing well. “We want The 2017 Good Governance Report to be the spark that encourages companies and organisations to embrace and debate governance at all levels.”

The report’s key findings

  • Energy companies performed better than the average, with the likes of Centrica, BP and BHP Billiton all making the top half of the list.
  • IT companies performed relatively poorly. Professor Paolo Volpin of Cass Business School said fast-growing tech companies that don't adhere to “governance norms” may run into problems later.
  • Audit and risk was the area of corporate governance that had the biggest influence on how companies were perceived by stakeholders.
  • Some companies did well overall despite low scores in particular areas. For example, engineering firm GKN was ranked third, despite scoring relatively low on stakeholder relations, while travel company TUI came 14th despite a low score for board effectiveness.
  • No correlation was found between the size of companies and how well governed they are. Estelle Clark, CQI executive director — policy, says this shows good governance is “not a matter of resource but of culture and will”.