Ofwat gives mixed report on company progress toward good governance

Ofwat said there was room for improvement and gaps in reporting but also good practice to be learned from when it published its first report on water companies’ response to the new board leadership, transparency and governance principles (BLTG).

Key findings

Some firms have been clear about the steps they are taking to meet the new board principles but others haven’t. Ofwat called for clarity from all in their annual reports.

A vast majority of boards have already taken steps to establish or refresh their company purpose, reflecting an awareness of their social purpose. But there was limited evidence of actions taken by boards to embed the company purpose and values into the culture of the business.

There were limited explanations of how companies’ approaches to board decision-making helped the board take full responsibility for the business or of action taken in relation to conflicts of interest – particularly those resulting from significant shareholdings.

There was some improved transparency compared to previous years’ reporting of how dividend and executive performance pay policies are linked to delivery for customers. However, it was often difficult to understand how dividend and bonus payments matched performance during the year. Ofwat added: “We expect to see a significant proportion of executive bonus payments to have been driven by delivery for customers, but most companies did not demonstrate this.”

Most companies have board structures to restrict the dominance of any one group and are conducive to independent challenge and diversity of thought. But there was a varying degree of detail about the board evaluation process undertaken, the outcomes of the exercise and any actions taken.

Companies will not report fully against the new objectives until July 2020, but Ofwat asked them to explain in their 2019 annual reporting the steps they are taking towards meeting the new objectives. Since August 2019, all water companies have had a licence condition in place to meet the objectives of the BLTG principles.