Being well run

Having information that is easy to understand and navigate allows customers, and other stakeholders to challenge companies’ performance – and encourages them to deliver better services. This helps everyone build trust and confidence in water.

Water and wastewater services are vital public services funded by customers. So people expect the companies that deliver those services to:

  • meet the highest standards of UK governance and disclosure
  • have effective boards containing:
    • significant independent membership
    • broad commercial and customer experience to deliver better services.

We set some principles for each company’s Board of Directors (‘Boards’) to help guide them in being well run. This includes:

  • delivering good leadership
  • being transparent
  • sound decision-making

Each year companies must also publish information to show they are meeting our principles.

We expect that companies will stick to our principles in full. But we know that sometimes they may not. In these cases, we expect them to explain why they have done something different.

Good quality and transparent reporting is important to maintain the trust and confidence of customers and others that the company is competent and responsible.

The quality of companies’ reporting on how they are meeting the principles forms part of our rating of their information quality .

2015-16

Being well run

Overall

We have reviewed companies’ 2015-16 annual reporting to assess how they are meeting our board leadership, transparency and governance principles . Our review covered the 17 largest monopoly water companies and, for the first time this year, the infrastructure provider, Bazalgette Tunnel (‘Tideway’).

This is third year in which we have reviewed companies’ annual reporting in this area. We have previously seen year on year improvements. This year the standard of reporting in this area remains good. However, we have not seen the degree of improvement we saw in previous years.

We set out examples of best practice reporting in December 2015. These examples still remain valid and we expect that companies will look at the approach of other companies for areas where they can improve their reporting.

Where we have identified issues, we will work with the companies concerned to improve their reporting for future years.

We will be reviewing our principles during 2017 to make sure that they are sufficiently clear and reflect relevant developments in corporate governance in recent years.

Principle: Transparency

Reporting must meet or exceed the standards set out in the Disclosure and Transparency Rules

Companies have generally provided good quality information in this area through providing comprehensive and well set out reporting on their governance. This has been accompanied by appropriately detailed and accessible explanations of directors’ remuneration. A couple of companies demonstrated leading practice in this area and only one company fell below expectations.

Principle: Focus on obligations

The regulated company must act as a separate listed company

An effective Board is fully focused on the regulated company’s obligations

Most companies clearly showed through their reporting how they were meeting this principle.

One company has implemented a different governance structure in meeting this principle, with our agreement, but it did not explain clearly to other stakeholders why its alternative approach was appropriate in the context of our principles.

Another company was not sufficiently clear about how the matters reserved to its holding company board allowed it to meet this principle. In this case we did not consider that significant issues were raised about the governance of the company.

However in both cases we were disappointed about the lack of transparency provided for stakeholders about how the companies concerned were meeting this principle.

Principle: Balanced Board

There must be significant independent representation on the Board

Independent non-executive directors are essential to securing strong board leadership and governance

In line with best practice, boards should have the appropriate balance of skills, experience, independence and knowledge of the company

With a couple of limited exceptions companies have a board composition which complies with the expectations set out in our principles. In a couple of instances companies have decided to take an alternative approach but not explained to stakeholders why they consider the approach which they have taken to be appropriate in their particular circumstances.

Principle: Independent Chair

The Chair must be independent of management and investors

Most companies have an independent chair. Where companies do not this is usually for the reason envisaged in our principles that they have a single owner. However there is scope for some companies to be clearer about either how their chair is independent or how an alternative approach is appropriate for their company.

Principle: Audit and pay oversight

Board committees, including but not limited to audit and remuneration committees will operate at the regulated level

There should be a majority of independent members on the audit and remuneration committees

This is an area where we have previously seen all companies complying with this principle. However this year two companies took the opportunity to take an alternative approach, which while it raises no significant issues from a governance point of view. We were disappointed that those companies did not explain to stakeholders why and how the approach they took was appropriate.

Principle: Explain group structure

The group structure must be explained in a way that is clear and simple to understand

This is an area where we have seen a variable quality of reporting. Some companies clearly set out their group structure, with a good explanation of the roles of different companies, making it accessible to all stakeholders. A significant minority of companies need to make improvements in:

  • properly explaining their group structures; or
  • ensuring that the information provided reflects the most up to date position, including any changes in the year.