There is a great culture clash at the heart of corporate governance. One side is knee-deep in codes, formality and process. The other simply looks at what is happening in an organisation and applies a common-sense test of whether things are working well, or badly.
The problem arises when the two get caught up together. Process gets in the way of clarity of thought. The freedom of common sense finds itself at odds with a formal method of reaching the same result.
A good example of this is some of the work that has come out of the Financial Reporting Council (FRC) over the last few years. Its programme of publications and initiatives around the central idea of getting rid of clutter – from the verbiage in annual reports and other communications to shareholders and stakeholders to the overload of figures and extraneous information – has worked well.
However, companies tend to be organised through process-driven corporate governance. Various routes of communication take us from the stakeholders, shareholders and the audit committee to the board of directors; or from external auditor and the audit committee to the finance director; or from the board of directors down to the external auditor via the audit committee. Formal methodologies for communications between these groups can start to get in the way. The sheer complexity of the different routes says it all.
Amid all this, the elements of common sense you gain from a clear mind can come unstuck. Messages become diluted. The originality of an idea becomes dulled. A bright, thoughtful initiative runs out of steam. But the process-driven memos, reports and assessments continue undeterred. And they tend to win.
This is why initiatives to remove clutter are so important in this field. They have a by-product as well. Once clarity of thought can be seen as the benchmark, then other issues become clearer. Actions which would not have been seen as necessary suddenly spring to mind. The company becomes a better place. Eventually this is turned into shareholder value, and everyone goes home happier.
The drive behind the FRC’s continued efforts to remove clutter was one man who stuck at the task: Ian Wright, FRC director of corporate reporting. He retired at the end of March, but his influence lives on in the publication of the latest instalment in his de-cluttering programme – Cutting Clutter: Combating clutter in annual reports.
It provides a template for people to cut through the process and behavioural barriers to clear thinking. As it says in the report: “Understanding the behavioural influences leading to clutter is key. All of those involved in the annual report process are influenced by others’ behaviours; the combined effect is often a barrier to cutting clutter. For example, the lack of agreement over what materiality means from a disclosure perspective results in each reviewer erring on the side of caution.” It provides clear guides for how to get rid of the behavioural barriers. In a series of spreads, the report also features “disclosure aids” that clearly provide the steps in the thought process and in the way that the reports are put together which should start to remove the clutter.
So the report does exactly what is required. It gives companies a way of overcoming the fossilised process that has become embedded. And it gives them the tools and templates to think things anew in simpler and clearer forms.
It will not be easy. The spread that deals with the chairman’s report will not appeal to the traditional ego-driven chairman, who will probably be driven to equally traditional fury at not having his usual blather spread over page after page. But companies taking all this to heart will find that they can overcome process with common sense.
The FRC report can be downloaded here
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