Resources Global Professionals FTSE 100 Resources Governance Index 2010
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Resources Global Professionals FTSE 100 Resources Governance Index 2010
©2010 Resources Global Professionals. All Rights Reserved. These materials may be reproduced only with Resources’ company name and logo included. All uses of the Resources Governance Index (RGI) must be properly identified as being the property and proprietary research of Resources.
Table of Contents
1 Introduction ...................................................................................................................................1
2 Key Findings .................................................................................................................................2
3 Results ..........................................................................................................................................4
3.1 The FTSE RGI Top 25 in 2010..........................................................................................4
3.2 The FTSE RGI Top 25 in 2009..........................................................................................5
3.3 Overall Results .................................................................................................................6
4 How is the RGI calculated? ...........................................................................................................7
4.1 Compliance.......................................................................................................................8
4.2 Capacity ...........................................................................................................................9
4.3 Commitment .....................................................................................................................9
4.4 Additional Credit / Plus Mark ........................................................................................... 11
4.5 Final Calculation of the RGI ............................................................................................ 11
5 Further Information ...................................................................................................................... 121 Introduction
This is the second year of the Resources Governance Index (RGI) for FTSE 100 companies and
although it may be too soon to identify trends there are identifiable shifts from the 2009 data, both in
the rankings of individual companies and the relative fortunes of different sectors. Also this year we
have extended our coverage of the Index to include the major European companies of the Eurostoxx
50 and these results are published separately. Using the RGI format consistently allows some direct
cross comparison between FTSE and European listed companies possible. Finally, we note that
while regulators have commented on the value that women do and could bring to the sound
functioning of boards, the level of involvement in 2010 is still low.
In general, 2010 is a year in which there has been considerable focus on corporate governance,
both in the UK and around the world. The reverberations of the global financial crisis continue and
fingers of criticism and blame continue to point towards the actions and decisions of boards and
senior management. The issues faced by BP have also raised issues of board responsibility and
accountability.
There have been a number of changes in corporate governance regulation this year. Early in the
year, key regulatory reforms were launched in the UK aiming to reduce the risk of unsound
governance in the future. The Walker Review of financial services corporate governance reported at
the end of 2009. This was followed by related consultations by the Financial Reporting Council
(FRC) and corresponding changes to the Combined Code (now known as the UK Corporate
Governance Code) and to various FSA (Financial Services Authority) regulations. The FRC
‘Stewardship Code’ has also been formalised.
It is far too early to judge the effectiveness of these amendments but in time it may be possible to
evaluate whether a substantive shift has occurred or a ‘corner has been turned’.
This report reflects the belief that good corporate governance lies at the core of robust and
successful business and the Index offers a basis for comparison and tracking of key dimensions of
governance across major corporations. The RGI continues its practice of independence by basing all
measurements on publicly available data. In so doing, it aims to provide a reference point for
investors, shareholders and other stakeholders as well as providing information for senior
management.
12 Key Findings
1. Financial Services have performed much better this year. The sector appears to have taken on
board the lessons and harsh criticism it has received and applied more resources and focus to
corporate governance. 8 out of the top 25 companies are from financial services in 2010,
compared to 2 in 2009. Standard Life fills the third place slot in 2010; in 2009 HSBC was the
leading financial services firm at 10th place, now 4th in 2010.
2. Overall, firms scored slightly higher in 2010 – up on average 5 index points - with fewer very
low scores at the foot of the table, although this zone is still dominated by companies based
overseas.
3. Compliance scores, which were generally quite good last year, are mostly foolproof in 2010
with many companies achieving a ‘perfect’ score of 100%. The question remains whether such
dedication to box ticking really represents the full picture or contributes to the development of a
healthy corporate governance culture
4. The keen performance in the compliance category is still not matched by similar success in the
areas we label commitment - going the extra mile for communities, the environment and
broader social responsibility. Scores for both capacity and commitment are down this year.
This is true for all but a few clearly socially responsible companies, creating a small elite cadre
at the top of our table. This in the year when the new international guidance standard - ISO
26000 - for Social Responsibility is to be published. Some environmental measures have
dipped significantly, against the background of increases in average revenue and profits
across the FTSE. Average revenues and profits across the FTSE were up and in some cases
significantly higher.
5. The uneven reporting of environmental data (CO2 emissions, waste water, recycling etc)
makes comparisons and therefore we must assume public understanding of progress in these
areas more difficult than it need be. A more standardised format for environmental data
reporting across the FTSE and other indices would be helpful. Some companies produce their
environmental and CSR (Corporate Social Responsibility) data in a separate report and later
than the annual report. There are examples of these ‘partnership’ or sustainability reports
emerging significantly later than planned. In some cases we have had to use 2009 data.
6. Data was also difficult to discern and interpret in the area of senior management and
especially CEO remuneration. It seems that the overwhelming messages about bonuses have
been taken on board and there has been general restraint, with increases in top salaries in line
with ‘genuine’ improving company performance. While we recognise that efforts have been
2made by remuneration committees to shift reward structures away from short term bonuses to
longer term incentives, the exact nature of this shift is hard to decipher and further thought by
companies about how these details can be presented more clearly would be welcome.
7. Board composition has come in for further attention and boards have changed their structure
and membership in terms of age/skill/time served and independence. The revised FRC rules
will now require increased time commitment of those appointed and a greater focus on the
quality of the challenge processes. Non Executive Directors (NEDs), in particular, will be
expected to ask for professional external advice and/or training if they feel they need it.
8. There are, as expected, individual risers and fallers. Although it is difficult to generalise,
beyond financial services’ success, the sectors performing well include pharmaceuticals,
industrials with a scientific bias and utilities. The top miners (BHP Billiton and Rio Tinto) still
show creditably, if knocked off their top spots by GlaxoSmithKline and Diageo. These are all
sectors where risk control and exposure is bound to be significant.
9. Our measures detect a range of good practice and the UK based FTSE firms show up well
against the European comparisons made for the first time this year. UK standards seem to be
driving the behaviour of others but there is evidence of a need for considerable tidying up in
governance across a middling group of companies.
10. Finally, but not insignificantly, we find that at the end of the first decade of the 21st century only
11.6% of FTSE board directors are women.
33 Results
3.1 The FTSE RGI Top 25 in 2010
Rank Company Compliance Capacity Commitment Plus?
1 GlaxoSmithKline A B A +
2 Diageo A B B +
3 Standard Life A B B +
4 HSBC Holdings A B B +
5 BHP Billiton A C B
6 Hammerson A C C +
7 Johnson Matthey B C B +
8 Aviva B C B +
9 Lonmin A C C
10 Old Mutual A A C +
11 United Utilities Group A C B
12 British Airways A B C
13 Standard Chartered A C C
14 Invensys A C C
15 Rio Tinto A B C +
16 Vodafone Group A C C +
17 Man Group A B C
18 Barclays A C C +
19 BT Group A C C
20 Reed Elsevier B C B +
21 Prudential A C C
22 National Grid A D B
23 Cobham A C C
24 InterContinental Hotels Group A C C
25 Lloyds Banking Group A B D +
43.2 The FTSE RGI Top 25 in 2009
Rank Company Compliance Capacity Commitment Plus?
1 Rio Tinto A A B +
2 BHP Billiton B C B +
3 Intercontinental Hotels Group A B B
4 British Airways A A C
5 Next A A C
6 AstraZeneca A C A +
7 Inmarsat B B A
8 GlaxoSmithKline B C B +
9 Cairn Energy D C A
10 HSBC Holdings B A D +
11 Imperial Tobacco Group A C B
12 Lonmin B B C
13 International Power B B B
14 Diageo A C B +
15 Vodafone Group A B C +
16 Rolls-Royce Group B C B
17 BT Group A C C +
18 Pearson A C B +
19 Man Group B C B
20 Sage Group A B C
21 BG Group A C B
22 Tullow Oil A C B
23 Unilever B C C +
24 RSA Insurance Group B B D +
25 Marks & Spencer Group B B C +
53.3 Overall Results
FTSE 100 numbers of companies achieving ratings
RGI Ratings A B C D E F Total
Compliance 65 (34) 33 (42) 0 (13) 0 (3) 0 (3) 1 (4) 99
Capacity 1 (4) 9 (15) 54 (55) 20 (21) 15 (3) 0 (1) 99
Commitment 1 (3) 12 (14) 70 (56) 14 (22) 2 (4) 0 (0) 99
Notes:
1. Data compiled from 2009-2010 annual and partnership reports as at June 2010.
2. Companies that were in the FTSE in 2009 but not in 2010:
● Amlin ● Foreign & Colonial ● Resolution
● Balfour Beatty Investment Trust ● Thomson Reuters
● Cadbury ● Friends Provident
● Drax Group ● Pennon Group
3. This year we recorded the number of pages in annual reports and these varied greatly,
from 70 to 504 pages – on average 5% up on last year. We noted that just one company
(Kingfisher) had changed its auditor in the period and in this case the audit fee fell
considerably.
4. There are 99 companies, Shell has two listings.
5. 2009 companies in brackets.
64 How is the RGI calculated?
The Index is constructed around three dimensions of corporate governance:
● Compliance
● Capacity
● Commitment
To ensure a state of equality for all organisations, the information used in the analysis is drawn
entirely from publicly available reports and accounts. It should be noted that the Index gives
additional credit to those organisations offering greater transparency and those who publish fuller
information in each category.
For each dimension, a number of independent factors or ‘elements’ have been selected as being
significant in assessing the effectiveness of corporate governance.
The assessment process involves three steps:
1. For each element a scoring system was devised to allow each company’s performance
to be evaluated and graded. In some cases the scores are based on all FTSE companies’
current practice and in other cases (where elements more closely relate to individual
industry sectors) companies have been scored against the current range for that sector.
2. Each element is then weighted according to a qualitative judgement of its significance in
corporate governance. By applying these weightings to each score an overall rating, A-F,
for each of the three dimensions is then calculated. This approach ensures that although there
are many elements included, no one element dominates the result.
3. The three A-F ratings for each category are then combined in a simple algorithm to give
the final index.
74.1 Compliance
Compliance is assessed with reference to each of the 48 sections of the Financial Reporting Council
Combined Code (June 2008) including:
1. The identification of senior roles and key committees
2. Separation of senior roles and appointment procedures and information/professional briefing
3. Identification, proportion and role of Independent, Senior Independent and Non-Executive
Directors
4. Performance evaluation of the board, its committees and its individual directors
5. Access to information and professional development
6. Remuneration structures and transparency
7. Audit and accountability
8. Relations with shareholders
Fuller reporting is given greater credit as is the quality of the “Compliance with Combined Code”
section of the company’s annual report, where companies explain why they may choose not to
comply. Scores were generally higher in the compliance category which is to be expected as this
reflects closer compliance with the Combined Code requirements.
84.2 Capacity
The evaluation of Capacity is based on an assessment of “Effectiveness”, “Reliability” and
“Performance”. The weightings are described as follows:
● Effectiveness (34% weighting)
This relates to the number of meetings held during the reporting period and the
levels of attendance of Board and key committee members at these meetings
● Reliability (43%)
This relates to the independence, size and composition of the Board and key
committees and looks beyond ‘Code’ compliance
● Performance (23%)
This considers the short versus long term nature of the remuneration of the CEO
and the relationship of this remuneration level to company performance
Since Capacity is a relative measure it is benchmarked against the best performers in the FTSE 100.
For Effectiveness and Reliability (the first two categories) the comparison is based on companies
with similar market capitalisation.
Overall, the scores achieved in Capacity fell compared to 2009.
4.3 Commitment
The analysis of Commitment is based on those elements considered to be part of good corporate
governance, that both influence and reflect a sound ethical corporate culture. Three main areas are
assessed:
● Community investment
22% weighting
● Sustainable development
34% weighting
● People
44% weighting
9The elements are described in more detail below.
1. Community Investment
The company as “good citizen” and neighbour.
● ‘Employment rate’ seeks to assess the contribution of the company in the
community by correlating business growth to change in employment rates. Our
formula can only suggest a connection between the two values but gives an
indication of how the companies consider their employees, i.e. either as a
fundamental part of the business or the first area where costs can be cut in
difficult market situations. This relates to salary issues below.
● Social Investments and charitable donations (including, where at all possible
management costs and time) relative to revenues.
● Human rights adherence – where reported on.
2. Sustainable Development
The company in the ‘Age of Responsibility’ with a long term view. The sustainability
of products and services is now critical. This is not just a marketing strategy, but good
environmental practices can also deliver cost savings thanks to efficiencies in the usage
of materials. Climate change has increased the focus on this component of ethical business.
Unfortunately, most of the data available only relates to environmental matters (which have
been weighted as follows):
CO2 Emissions ................................. 8%
Renewable Energy usage ................ 5%
Total Energy usage .......................... 8%
Water consumption .......................... 3%
Waste production ............................. 4%
Waste Recycling .............................. 6%
3. People
The company as an equitable and committed employer. This compares CEO and NED
salaries/bonuses with the average employee salary/bonus and relates changes in employee
remuneration to changes in company revenue. This helps to clarify the community investment
alignment above and is also linked to pension and social security contributions.
104.4 Additional Credit / Plus Mark
Additional credit is given for having an internal Code of Ethics and Code of Conduct, although it
should be noted that this does not necessarily indicate an embedded ethical culture. It should also
be noted that openness to using external evaluation schemes and/or assurance gains extra credit.
4.5 Final Calculation of the RGI
By combining the scores for each element a company is given a rating for each dimension from A to
E. Where there is insufficient information to rate a company for an individual element they are
awarded an F. The scores, once calculated, are combined into the RGI enabling the companies to
be ranked. The weightings used to produce the final index are as follows:
Compliance....................................25%
Capacity .........................................38%
Commitment ..................................32%
Plus Mark ........................................ 5%
Total .............................................100%
115 Further Information
Resources Global Professionals intend to compile a similar Index in 2011. For further copies of this
report and additional information please contact Jennifer McGregor.
rgi@resources-uk.com
+44 (0) 131 260 3700
About Resources Global Professionals
Resources Global Professionals ("Resources Global") is an international professional services firm
that helps business leaders execute internal initiatives. Partnering with client teams, we solve
problems, execute plans, transfer knowledge and help drive change through all levels of the
enterprise, all over the world.
Our professionals are experienced problem solvers with an average of 18-years experience in the
fields of finance and accounting, human capital, information management, internal audit, legal,
supply chain and governance, risk and compliance (GRC).
Resources Global was founded in 1996 within a Big Four accounting firm. Today, Resources Global
is a publicly traded company with over 2,700 professionals (from more than 80 offices) serving 2,100
clients in 66 countries. Headquartered in California, Resources Global has served 84 of the Fortune
100 companies.
More information about Resources Global is available at www.resourcesglobal.com
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