Z/Yen have been working with the Institute of Directors (IoD) and Cass Business School to launch a new Corporate Governance initiative which we hope will grow and flourish over time. The objective was to develop and test different ways of measuring and reporting on corporate governance in UK listed companies. From this we aim to encourage good governance amongst UK companies and also stimulate a public debate on the importance of corporate governance in rebuilding the reputation of the UK business community.

Our first challenge was to define corporate governance. As the project chairman, Ken Olisa OBE, said about governance “It is hard to define because governance is all about behaviours; and behaviours, whether individual or collective – are hard to reduce to a coherent framework”. We looked at a number of definitions, before choosing to use the UK Corporate Governance code as our definition.

We sought to measure corporate governance using different approaches. We surveyed UK business professionals, including members of the IoD, ACCA and CISI, asking them to rate the governance of companies they were familiar with.. We also selected more than 50 instrumental factors, third party independent data points which the team assessed as having a relationship with corporate governance (the nature and direction of that relationship causing much debate). Both these results are published in the report.

Finally we built a predictive model using support vector machine regression to predict how survey respondents would have rated companies they were not familiar with. This allowed us to build a third set of results, combining the views of the survey respondents with the instrumental factors.

Each approach gave different, yet reasonable results. The predictive model approach shows that some companies suffer from a reputational disadvantage, i.e., their public reputation lowers their score from what the instrumental factors alone might suggest. It is hard to measure the impact and appropriate scale of some instrumental factors – is it better to have two audit committee meetings or 22? We need more understanding of how different factors, and different behaviours can be assessed.

It seems clear that although all agree that developing a measure of governance would be valuable, there is no one simple approach we can use. The report contains three different sets of results, grouping companies into tiers according to their results in the different approaches. We are aware that more work needs to be done to build a shared understanding of how to measure governance. Z/Yen and the IoD are looking forward to creating a meaningful and useful measurement approach.

Xueyi Jiang, our data lead on this project, chose a tree to illustrate the count of key words from the survey responses on the front page of the report. It seems appropriate as an image for this complex project and the complex and growing organism that is corporate governance. We are looking forward to continuing the debate and inviting your thoughts over the next few weeks and months.

The report is available for download here. If you would like to contribute to the survey please go to www.zyen.info/goodvgovernance. For more information please contact mary_ocallaghan@zyen.com.