Overview
As part of our review of companies’ annual reports and regulatory accounts for 2013-14 we have examined the way in which companies are meeting Ofwat’s ‘Board leadership, transparency and governance – principles’. All companies have put in place governance codes and are committed to fully meeting our principles by 1 April 2015.
The Consumer Council for Water has told us that it has also been looking at corporate governance information on companies’ websites to see how readily a customer might find this information and whether it can be easily understood. It will talk to companies about its findings and how the accessibility of this information might be improved. We expect companies to take steps to make improvements, so that customers have trust and confidence in the companies that provide them with this essential public service.
We have been pleased to see another year-on-year improvement to the transparency and coverage of companies’ statements on board governance. This is a transition year as all companies move to a position where they fully meet Ofwat’s principles. Some companies already meet them in full, others have further to go particularly with regard to the composition of their boards. We welcome the positive steps that companies are taking to do this and recognise that for some this means significant changes to the constitution of the board.
Some companies have taken leading approaches, others need to do more.
How companies are meeting our principles – what we have seen
Transparency – reporting must meet or exceed the standards set out in the Disclosure and Transparency Rules
Some companies have included a dedicated corporate governance section in their annual report. Some have also included reference to Ofwat’s principles and how this has guided their approaches, as well as the changes that they intend to make so that they can fully meet the principles. We also welcome the improvements that some companies have made to their websites which are easy to navigate and complement the information that is included in the annual report. In other cases this information cannot be found readily on the website and is not comprehensive or written in a way that is meaningful to stakeholders. Some companies have also provided clear descriptions of their shareholders.
The regulated company must act as a separate listed company
An effective Board is fully focused on the regulated company’s obligations
An area where we see room for improvement is the way in which companies explain how the regulated water and sewerage provider acts independently and at an arm’s length basis from its holding company and associates. It is an important area for stakeholders. We will be examining this closely over the coming year. Some companies have described clearly which boards are responsible for which decisions but others have more to do.
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
This is an area where some companies are making significant changes to the composition of their boards so that independent non-executive directors are the largest group on the Board. Where companies have included a synopsis of their board membership differentiating between the different types of directors this is helpful, for example by setting out clearly which directors are investor directors and describing the interests they represent. Additionally, others have described the specialist knowledge that each Director brings to the board.
The Chair must be independent of management and investors
The majority of companies now have an independent chairman or plans in place to appoint them ahead of 1 April 2015. Exceptionally, where the ultimate controller of the regulated company is a single entity a departure from this principle may be sought. Where this is the case we expect this to be transparently disclosed and details of the alternative arrangements, for example the senior independent director is responsible for interactions with the regulator, to be set out clearly.
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
The transparency with which some companies have described the number, attendance and coverage of board meetings is welcomed. As is the way in which companies have describe the membership of board committees and provided reports on what has been discussed and concluded at these meetings.
The group structure must be explained in a way that is clear and simple to understand
A few companies have explained clearly how the regulated company fits within the wider group, but others need to improve the transparency of this. This is an area where we expect companies to do better.