Governing for customer outcomes

What has corporate governance got to do with customers? It’s an interesting question and one with a simple answer:

Everything.

But the trouble is that customers aren’t always at the top of the list when it comes to governance and, in particular, governance reporting. In essence, effective corporate governance underpins the running of an organisation, encompassing areas such as diversity and succession planning, risk identification and management, boardroom decisions and leadership.

The latest review by the Financial Reporting Council (FRC) comments that: “Demonstrating effective corporate governance builds trust that is necessary to attract investment and support capital formation.” It goes on to comment that corporate governance reporting will indicate areas such as “the transparency and integrity of board decision-making, and how the company demonstrates accountability to investors and wider stakeholders.”

Both those comments lean heavily towards investors. And indeed we wouldn’t discount the vital role which investors play in corporate outcomes. But without customers, there is no business. And the quality and depth of corporate governance and reporting is as important for customers and suppliers as it is for investors and other stakeholders. Let’s look at a few areas from the FRC’s latest report.

Environment and social issues

It may be fair to say that even before the recent COP26 summit, the topic of climate change had increasingly been rising up the agenda. And with climate, environmental and social issues entering the mainstream, customers are increasingly looking for companies to play their part. So the fact that in the FRC review some firms neither reported on boardroom discussions on environmental issues nor disclosed climate targets outside of mandatory CO2 emissions is concerning. So too are the statements issued by other companies which use vague language to set out what the company wants to achieve without any detail of what actions were to be taken. How can customers elect to trade with environmentally conscious businesses if companies just aren’t providing enough information to enable a meaningful decision to be made?

Diversity and inclusion

Numerous statistics have shown that the more diverse an organisation, the better it can cater for its, often diverse, customer base. For example, without diversity at boardroom level, groupthink can lead to poor customer outcomes. So the FRC’s observation that there is often a lack of cohesion between policies and succession plans is somewhat concerning. Diversity and inclusion is either embedded across the organisation or it just isn’t there.

Risk

The events of the past two years have shown us how important risk awareness and planning are if a company is to continue to serve its customers to the best of its ability. On a positive note the FRC confirmed that all of the companies surveyed annually reviewed their risk management and internal control systems. On a less positive note, a significant number either gave no further information, or failed to confirm that they also reviewed emerging risks on an annual basis. Without more detailed information how can customers place their faith in a company which may not have taken effective steps to identify and moderate risk?

And finally: as we commented above good corporate governance reporting enables investors to make effective and balanced investment decisions. Without those decisions companies may struggle, having to cut costs or being unable to develop improved products or services. In any of those instances customer service will inevitably deteriorate. Yet another reason why corporate governance and reporting is key to great customer outcomes.