7th March 2014
Corporate governance is tricky subject for many small and medium-sized enterprises (SMEs), and it seems many are falling short of their obligations.
A review of corporate governance behaviour published by the Quoted Companies Alliance suggests firms need a lot more assistance with their corporate reporting. In particular the firms surveyed struggled with complex disclosures, such as a summary of board evaluation procedures, the results of the evaluation and any action planned or taken.
As regulations get more complex in jurisdictions globally, such issues may become more pronounced over time. The report identified some key areas where SMEs could do with help.
Although the majority (68 per cent) of remuneration committee reports reviewed explained how the company’s remuneration policy and practice align with the company’s strategy, just 38 per cent of SMEs followed recommendations to explain how the business's risks align with the strategy of the company.
Meanwhile just 31 per cent of companies provided an explanation to shareholders of how the objectivity and independence of their auditors is safeguarded. Perhaps most worryingly, just 17 per cent of companies followed best practice by explaining how their audit committee dealt with risk.
Colin Jones, deputy chairman of the Quoted Companies Alliance Corporate Governance Expert Group, says the report shows that boards of SMEs need to become “more effective in articulating how and why the decisions they make link to strategy, governance and risk management”. He explained: “Institutional investors realise that this is hard to do; but, it is important that companies are seen to be trying to address difficult areas and not to be hiding any bad news.”
Clearly there is work to be done, but the report did plenty of examples of good practice. It identified good levels of disclosure relating to companies’ providing their annual report and accounts and other governance material on their website; brief descriptions of the work of each board committee and its role; information on directors, their roles and committee membership; and the responsibilities and accountability of each board committee.
Tim Ward, chief executive of the Quoted Companies Alliance, notes that SMEs don’t have to be perfect, but there is pressure to constantly improve. “Investors do not expect companies to ‘tick all the boxes’,” he said. “They want to see companies improving their corporate behaviour over time as they grow.”