Challenges in governance reporting

Achieving a fair valuation remains the central objective of IR. And as always, we remember it is not the ‘best’ valuation, for many reasons.

A new book “Corporate Valuation for Portfolio Investment” by Robert A. G. Monks and Alexandra Reed LaJoux offers a number of views on valuation. In addition to defining the techniques and processes of valuation (“quant jocks”), Monks argues that few financial topics matter more than valuation. Without the possibility of a reasonably accurate valuation, there could be no equity markets, with all its social consequences.

Monks also claims that "this book articulates the principle that a well-governed company is worth more than one that is not”. Which begs the question of how investors can ‘value’ good governance. For me, much of it is about communication.

If the FRC has its way, governance reports will look very different next year. The much quoted ‘fungus of boilerplate’ may(?) change how companies approach this. But what are the key areas that companies will want to look at? Some questions to answer spring to mind.

What does governance mean to us? How governance is embedded in the company, how appropriate behaviours are fostered by the Board, policies on values and ethics.

How does governance link to our business model? How does it fit with the rest of the Operating and Financial Review disclosures, and with strategy and risk?

How do we organise ourselves? Going beyond the traditional board profiles, to illustrate why the board assets are more valuable than the sum of their parts. Discussion of diversity of talent, succession planning and decision-making.

How effective have we been? Board evaluations and how they can help communicate the ‘culture’ of the board.

How have we kept you informed? A commitment to making it easier for shareholders to engage.

As preparers look at how to respond to these – and other – issues, it may be worth considering how governance impacts a valuation.