Corporate governance reporting has moved to the forefront over the past few decades, with upper management, shareholders, and other corporate stakeholders often unearthing conflicts of interest. These conflicts necessitated corporate governance reporting, which provides structures that assure stakeholders of corporations’ commitment to good corporate governance and compliance with all applicable laws and regulations.
The media and the public first took a targeted interest in corporate governance practices in the United States after the high-profile collapses of multiple large corporations in 2001 and 2002. Still, the interest in better corporate governance reporting peaked following the financial crisis of 2008.
Corporate scandals and the fall of other large corporations — like Enron, MCI Inc., and others — paved the way for more rigorous corporate governance reporting regulations. There is an expectation for modern businesses and boards to both keep up with historical regulations and stay abreast of regulations as they emerge. To help you do that, this article will explain:
- What corporate governance is
- The main pillars of corporate governance
- What corporate governance reporting is
- Who reads and writes corporate governance reports
- Corporate governance reporting best practices
- How automation improves corporate governance reports
What is corporate governance?
Corporate governance implements a collection of processes, policies, structures and relationships to control and direct corporations and hold them to account.
Corporate governance includes the practices and procedures that corporations rely on to make sound decisions in corporate affairs, and it delineates the roles and responsibilities of many different individuals, including:
- Boards of directors
What are the pillars of corporate governance?
Corporate governance is divided into six broad categories: accountability, efficiency and effectiveness, fairness, responsibility, transparency and independence. Each of these pillars influences corporate governance reporting and how boards disclose their activities:
- Accountability: a corporation’s leadership, including the board and the senior managers, are individually and collectively accountable for their actions and decisions.
- Efficiency and effectiveness: leadership needs to continually monitor their activities and operations to ensure they’re efficient and effective and support the corporation’s mission.
- Fairness: corporate governance requires a corporation’s leaders to be honest, faithful, diligent and fair at all times and be mindful of the importance of displaying ethical and virtuous behavior.
- Responsibility: Leaders must be capable, responsible, and aware of their obligations and responsibilities.
- Transparency: Openness and transparency are primary components of good governance. Leadership must report information about the company accurately and promptly.
- Independence: An impartial board is essential to good corporate governance because it ensures that decision-making is objective and fair.
What is corporate governance reporting?
Corporate governance reporting is an ethically driven business process that reflects how corporations monitor the corporation’s actions, policies, practices and decisions, as well as the effect of their actions on their agents and affected stakeholders.
These reports typically include information about corporate governance procedures, regulatory compliance, company and board performance, board composition and how effective the company is at following good governance practices.
Corporate governance reports aim to provide shareholders visibility into how the corporation does business, specifically the corporation’s model, structure, activities and performance.
Who writes the corporate governance report?
In most large corporations, governance and compliance reporting fall under the direction of the Chief Compliance Officer (CCO). The CCO is responsible for establishing company-wide standards and implementing procedures to ensure that an organisation’s governance and compliance programs can effectively and efficiently identify, prevent, detect and correct noncompliance issues with applicable laws, regulations, industry standards or company policies.
Members of the compliance department and the corporate secretary may recruit or consult with subject matter experts to complete a particular report and, often, gather data from across the organisation through polling and questionnaires.
In smaller organisations or organisations without a compliance officer, the responsibility for reporting may fall on a member of the legal department or another qualified employee. When choosing a manager to lead a compliance reporting team, it is best to find someone with expertise in the particular business operation under review and the regulations or mandates involved in the compliance initiative. It is also important to note that this manager may need temporary relief from their typical duties, as compliance reporting can require extra time and effort.
Who reads the corporate governance report?
Corporate governance and compliance reporting (like ESG reporting) can have various audiences, depending on the particular focus of the report and whether or not the report is internal or outward-facing.
- Outward-facing reports are usually part of a larger compliance audit that an organisation undergoes as part of a request or review required by regulatory agencies. Members of the appropriate regulatory agency read these types of corporate governance reporting and can be integral in determining whether the organisation faces fines, sanctions or other penalties. A thorough compliance and governance report indicates that the organisation operates in good faith and may sway a regulatory board to work with the company toward remediation.
- Internal compliance reports are often more targeted in scope and, depending on their focus, may be read by many different groups throughout the organisation. A broad summary of compliance and governance efforts might be presented to board members or select stakeholders to demonstrate the company’s position about current regulations and reasonable governance procedures.
The details of compliance and corporate governance reporting might also concern a select department whose work with new regulations informs their business dealings or plans. Finally, the organisation may use the lessons from a compliance report to educate the broader workforce on the importance and necessity of following standard procedures and policies.
How laws and regulations have driven corporate governance reporting
Just as competitors in various industries borrow concepts and principles from one another, governments and regulators worldwide try to learn from each other how to improve corporate governance practices. The following is a brief look at how some significant laws and regulations have improved corporate governance over time.
- The Cadbury Report in the United Kingdom came out in 1992. It was one of the first significant events in modern corporate governance. The report recommended establishing corporate boards and accounting systems to reduce the potential for corporate risks and failures.
- The Sarbanes-Oxley Act (SOX) was passed in the United States in 2002. It’s a federal law that established new auditing and financial regulations for companies. The law intends to help protect shareholders, employees and the public from accounting errors and fraud surrounding financial practices. SOX primarily pertains to financial reporting and business practices at publicly traded companies, although some of its provisions pertain to all organisations, including private companies and nonprofits. SOX also established penalties for companies that are found to be non-compliant with its provisions. The Securities and Exchange Commission (SEC) is responsible for enforcing the provisions put forth in SOX.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as the Dodd-Frank Act, is a federal law passed in 2010 in the United States, making the government responsible for regulating corporate transparency and accountability in the financial industry. One of the primary goals of the Dodd-Frank Act was to enforce more stringent regulations on banks. The Act also created the Financial Stability Oversight Council (FSOC) and assigned it the task of addressing persistent issues that affect the financial market in the hopes that it will prevent another recession.
The Dodd-Frank Act incorporated a whistleblowing provision with a financial reward to help deter security violations. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau to protect consumers from large, unregulated banks. Many financial experts believe that the Dodd-Frank Act will prevent future financial crises that mirror that of 2008 and the abuses that led to it.
- The Securities and Exchange Board of India (SEBI) amended the listing agreement in India. The new norms require stricter disclosures and protections for investors’ rights. The changes include provisions for equitable treatment for minority and foreign shareholders. The changes also require companies to get shareholder approval for related party transactions, establish whistleblower policies, increase disclosures on pay packages, and require companies to have at least one female director on every board. These norms align closely with the Companies Act of 2013, also made into law in India.
- The UK Corporate Governance Code was passed in 2018 to apply universal governance policies and procedures to premium-listed companies in the UK. It includes frameworks for board leadership, composition, succession and more. This code has evolved along with the FRC review of corporate governance reporting, during which the FRC assesses a random sample of corporate governance reporting from companies subject to the act.
Contents of a corporate governance report
Governance reports offer detailed accounts of an organisation’s progress on particular compliance initiatives or, taken collectively, can provide a broad summary of your company’s compliance efforts.
Also called the annual corporate report, a corporate governance report includes a statement of corporate governance procedures and compliance, information on board composition, statements on the company’s performance, and information about compliance and conformance with best practices for good corporate governance.
- Statements of Disclosure of Governance Procedures and Compliance: The corporate report should include a statement of disclosure of the company’s governance procedures and compliance. It should also disclose the principles and codes that guide the company’s procedures. Disclosure statements usually detail the distribution of powers between the board chair and the CEO. Best practices in today’s marketplace discourage the same individual from serving as CEO and board chair.
- Board composition: The average size of corporate boards is 9.2 directors. The ideal size of a corporate board is seven to 11 members. Best practices for good corporate governance recommend that boards strive for a mix of board directors in competencies, age, gender, profession, independence and diversity. There should also be a mix of executive and independent directors, with the majority being independent directors. Corporate governance reporting should disclose the regularity and frequency of board meetings.
- Board roles and responsibilities: The corporate governance report should contain a section that lists the powers, functions, roles and responsibilities of board directors. The report includes information about committees, sub-committees, and delegated powers and duties. This section of the report should consist of conformance and transformative functions.
- Board succession and evaluation: Shareholders may be particularly interested in reading information about board directors in the corporate governance report. Such information may include the company’s procedures for appointing directors, board development, succession planning and remuneration by shareholding members.
- Board performance: Disclosures often describe the corporation’s mechanisms for monitoring the board’s performance, as well as the performance of individual board directors. It also includes information about related party transactions, conflicts of interest and how the board handled them.
- Business plan and budget: A section of the annual report details the overall organisational plan and how it relates to business plans and budgets, operational and performance measures, and a description of risk management and internal control procedures. These reports provide evidence of accountability and transparency and support generally accepted accounting and auditing standards. Sections on accounting also specifically disclose the company’s relationship with internal and external auditors.
- Communications and compliance: Disclosure statements also cover such issues as communications with shareholders and stakeholders, legal compliance, and codes of conduct for the board, CEO, management and staff.
- Performance forecasts: Statements usually detail the nature of the business and its prospects. Shareholders are interested in the company’s outlook for growth, sustainability and innovation and how the corporation plans to factor future market trends into its strategic planning.
For an example of good corporate governance reporting, look at this sample of a corporate governance report for Infosys Limited.
Corporate governance reporting best practices
Corporate governance reports should be updated at least annually. But that doesn’t mean that boards should limit their reviews to only once per year. A thorough corporate governance report is the product of effective day-in-day-out practices that are continuously reviewed and disclosed.
To do that, boards should strive to adopt the following best practices for corporate governance reporting:
- Hold regular meetings: Regular meetings keep the board and other shareholders engaged in company activities. This is an important — if obvious — principle in good governance, as it empowers all relevant parties to take part in furthering ethical business practices.
- Practice transparency: Corporate governance reporting relies on transparency. Boards should practice this transparency in reports and everything they do. Ideally, boards will report information as it becomes available and explain the rationale behind critical decisions like board compensation.
- Conduct annual performance reviews: Regular board reviews are a chance to collect feedback from internal stakeholders and external shareholders. This can be a critical inflexion point for boards to continue effective work or pivot approaches that aren’t meeting company or regulatory expectations. It’s also a vital governance practice that can bolster the contents of the corporate governance report.
- Adopt ongoing reporting: Not all decisions or practices will perform as expected. Continued reporting on key insights allows boards to change course as needed, whether amending governance practices or making different decisions for the business’s future. Corporate governance reporting can tap into these reports, offering more profound insights into the board’s year-long performance.
- Utilize technology: Corporate governance reporting adds another layer to good governance. It compels boards to not only define the governance practices they follow but also to report on how successful those practices are. Technology can help boards automate routine tasks, centralise data and provide insight into multiple entities. Beware of free technology, though, as it likely won’t offer all the features thorough reporting requires.
Benefits of improved governance reporting
Corporate governance reporting identifies areas within the company where they meet compliance initiatives and areas where more work is needed to meet the regulation standards. With this knowledge, business leaders can make more effective decisions about resource allocation, risk management and strategic planning.
In addition, the completion of annual compliance reports has two critical benefits for your organisation:
- Peace of mind. Governance and compliance is a complicated endeavour, with many goals seeming like moving targets. Corporate governance reporting offers concrete evidence that your organisation is on the right side of regulations and can be the starting place for any plan to reconcile noncompliance issues. Annual compliance reporting can be an integral way of identifying likely problems before they develop into full-fledged violations.
- Client assurance. A thorough, annual compliance report is like a clean bill of health. With it, your organisation can demonstrate to clients and potential investors that your operations and controls are trustworthy. As the list of mandatory regulations grows, more and more clients expect organisations to be able to prove proof of governance before they enter into contracts or invest funds. Those who cannot do so might cause hesitation or concern for potential business partners.
Turn corporate governance reporting into strategic growth.
Corporate governance reporting can be more than retrospective. Instead, it can become an enterprise-wide source of truth that reduces noncompliance, eliminates inefficiencies and reduces management costs by 90%.
What does that look like in practice? Corporate governance reporting automation that puts repetitive processes on autopilot, freeing up capacity to identify strategic growth opportunities.
Download our recent Forrester Report to see how Diligent Entities reduces the burden of corporate governance reporting, leading to a 318% ROI.