DOCUMENTATION

• Significant documents
• Drivers of reports to the board
• Characteristics of effective information
• Categories and classifications of reports to the board

Significant documents: Best Practice in Corporate Governance

International Best Practice – Significant documents

• Official and quasi-official statements
• The Cadbury Report, The Financial Aspects of Corporate Governance (UK) 1992
• The King Committee Report (South Africa) 1994
• The Bosch Committee Report, (Aus), 1995
• The Combined Code, June 1998 (UK)
• Australian Stock Exchange Listing rule requiring a statement of corporate governance practices, 1996
• Blue Ribbon Report on Audit committees, February 1999 (USA)
• OECD Principles of Corporate Governance, May 1999
• Commonwealth Association for Corporate Governance, Principles for Corporate Governance in the Commonwealth, November 1999
• European Association of Securities Dealers, Corporate Governance Principles and Recommendations, May 2000
• Australian Stock Exchange, Principles of Good Corporate Governance and Best Practice Recommendations, 2003
• Standards Australia, Good Governance Principles AS 8000, 2003

Institutional investor statements

• TIAA-Cref, Policy Statement on Corporate Governance, October 1997 (US)
• CalPERS, Corporate Governance market Principles, April 1998 (US)
• Council of Institutional Investors, Corporate Governance Core Policies, Policies and Positions 1998 (US)
• Hermes, ‘Statement on Corporate Governance and Voting Policy’ July 1998 (UK) and International Corporate Governance Principles, July 1999
• International Corporate Governance Network
• Australian Shareholders Association, Statement of Corporate Governance Principles

Ethics, Corporate Social Responsibility and Accountability Statements

• Asia Pacific Economic Cooperation (APEC) Code of Business Conduct
• Caux Round Table Principles for BusinessGlobal Reporting Initiative (GRI)
• Global Sullivan Principles
• Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises
• Shell Business Principles-People, planet & profits: The Shell Report 2000
• Taskforce on the Churches and Corporate Responsibility: Principles for Global Corporate Responsibility: Benchmarks for Measuring Business Performance
• Social Accountability International SA8000
• AccountAbility 1000 Framework

Corporate Statements

• CLP Holdings Corporate Governance-CLP Principles and Practices, August 2000 (Hong Kong)
• General Motors Corporate Governance Guidelines, January 1995 and 1997
• Shell, The Shell Report 2001

Drivers of reports to the board

Corporate Governance

According to Corporate Governance-Good governance principles (AS 8000), 'the essence of good governance is accountability'.

The Board of Directors ('the Board') of an entity is responsible for that entity's strategic and operational performance. This view is reflected in the Principles of good corporate governance and best practice recommendation (ASX Corporate Governance Council) which states '. . . the board would be responsible for oversight of the company, including its control and accountability systems. . . and approving and monitoring financial and other reporting.'

An entity's management is delegated responsibility for the management of the entity. Management is, therefore, responsible for providing the information that a Board requires in order to discharge its responsibilities effectively.

Recent corporate disasters serve to illustrate the Organisation for Economic Co-operation and Development (OECD) view that 'the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.' (OECD Principles of Corporate Governance)

Regulatory, Legislative Context

Directors and Officers are required to discharge their duties with care and diligence. In making a business judgment, a Director or Officer will have met the requirement of the duty of care and diligence if they have 'informed themselves about the subject matter of the business judgment' (Section 180 (2) of the Corporations Act and Section 22 (2) of the CAC Act). Board reporting facilitates the requirement for Boards to be informed of matters on which they would have to make business decisions. Entities, which have not been formed under the Corporations Act, do not have to comply with the ASXs requirements.

It is, therefore, important that Directors, Executive Officers and management take into account factors such as their organisation's structure and size, their legislative and regulatory drivers and their industry when they develop internal reporting which is designed to meet agreed minimum standards that allow Directors discharge their duties effectively.

Characteristics of effective information

Relevant

Information presented to the Board should be sharply focused and reflect the defined objectives and overall strategy of an organisation

Integrated

Organisations produce information for a range of internal and external purposes.' According to the ..., ' the systems and processes used to provide this information should, as far as possible, be integrated. (In other words) the data collected internally should be managed (so) that it satisfies both internal and external reporting needs.

In perspective

Information should be presented in relevant time context.

Timely

It's better that the board receives information that's imperfect (but within acceptable tolerances of precision) in good time than completely accurate information too late.

Reliable

Information should be of good enough quality for the board to be confident in it. This will depend on its source, integrity and comprehensiveness.

Comparable

The report covers both financial and non-financial aspects of performance. For financial performance, comparing what happens (actual) with what should have happened (budget/plan/rolling forecast), or in some cases, what did happen previously (last month/year).

Clear

Reports should always be written clearly and simply. Used judiciously, graphs and charts can be an effective communication medium for key indicators. They will also enable trends to be identified more easily.'

Transparent

According to the Chartered Institute of Management Accountants, 'transparency - as an overarching concept guiding the reporting process in a company-should become the cornerstone of good corporate governance' (Performance Reporting to Boards: A Guide to Good Practice).

Following recent corporate disasters, there is a growing demand for transparency in reporting, especially in reporting to external stakeholders. However, there is a need to incorporate transparency in internal reporting as well.

Good practice/poor practice table

Categories and classifications of reports to the board

There are two major categories of internal reports:

• Financial.
• Non-financial.

Boards will need to take into consideration factors such as the industry they operate in and the legislative and regulatory context applicable to their entity when determining the reports needed.

It must also be noted that Boards will need some of these reports on a regular basis whereas some of the reports may only be required on a periodic basis.

Reports to the Board should be broadly classified into:

• Papers for board decisions.
• Papers for board information.

Financial Reports

Depending on the requirement of the Board the following items can be included in a financial report:

• Statement of Profit and Loss. This statement should include comparison against budget and presented in year to date and for the same period the previous year.
• Balance Sheet.
• Cashflow analysis.
• Capital expenditure items.
• Summary of Accounts-which should highlight key items such as:
• Outstanding Creditors-agreed timeframe.
• Outstanding Debtors-agreed timeframe.
• Any material variances to budget.

Other Financial Reporting

Depending on the nature of an entity's business, the industry it belongs to and the legal and regulatory framework it operates under, the following finance related reports may be presented to the Board:

• International Accounting Standards report. The proposed International Accounting Standards may have significant impact on an entity, and the Board should be aware of progress made towards the adoption of these Standards and the financial impact on the entity.
• Inventories Report. The Inventories report includes status of inventory across the entity, with a view to highlighting areas of wastage.
• Foreign Exchange Report. Many entities fail to manage foreign exchange related risks. The Board must be made aware of the entity's exposures to foreign currency risks and the controls in place to mitigate them to an acceptable level.
• Financial Ratio Analyses. Standard ratios can be used across all businesses as well as benchmarks with others in the same industry. This allows an entity to see how it is progressing against its own Plans, competitors and good practice.

These Reports may need to be broken down into divisional, business unit or other appropriate segments.

Non-Financial Reports

The following is an illustrative example of the non-financial information that could be presented to Boards:

• Chairman's Report. A brief report on activities the Chairman has been involved in since the last report.
• Chief Executive's Report. The Chief Executive's activities since the last report. This report would allow the Chief Executive an opportunity to raise any issues, not on the agenda, that the Board should be aware of in running the entity.
• Marketing Report:
  • Customer satisfaction (what do our customers think of us and our service?).
  • Competitor activity and analyses.
  • Marketing campaigns about to be launched and the status of current campaigns.
• Production Report:
  • Under-utilised or under performing resources and assets.
  • Key performance indicators and any variances from plan.
  • Any production issues affecting performance.
• Human Resources Report:
  • Staff numbers and attrition rates.
  • Leave entitlement liabilities.
  • OHS issues.
• Corporate Plan Report, including status against the Corporate Plan.
• Environmental and Community report:
  • Performance against key environmental indicators.
  • Any community initiatives undertaken
• Operations Report. The Operations Report could summarise activities in the following areas:
  • Legal and Compliance:
    • A summary of matters involving litigation against the entity
    • A listing of any breaches of regulatory requirements including remedial action taken or being taken
    • Any new or proposed legislation that will impact on the entity
    • Listing of all contracts due for renewal and the strategy in place to review and develop the relationship with the provider in the interests of the entity.
• Risk Management (an update on the entity's key risks and mitigation strategies)
• Information Technology (Reports on any significant information technology issues and remedial action.)
• Emerging issues and proposed strategies