Solstice Renewables: a compliance claim that conceals governance departures
Solstice Renewables is listed on a small European exchange with a comply-or-explain governance code. It has 12 directors, of whom four are independent. The chair stepped down as chief executive 14 months ago and remains chair; the audit committee chair is a former marketing director with no financial reporting experience. The code recommends that the chair be independent on appointment and that the audit committee chair have recent and relevant financial experience. The company has explained neither departure. A large institutional investor has written asking for an explanation. In the draft annual report the governance statement says: 'The company has complied with all applicable governance requirements.' The chair argues that explaining the departures would be commercially damaging and that the code permits the company to explain rather than comply. The CFO wants to publish the statement as drafted because the deadline is in ten days. A non-executive director has asked whether the statement is accurate and what the board should do.
1. Evaluate the draft statement against the transparency expectations of ISO 37000. Is 'comply or explain' satisfied by a statement of compliance?
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The statement is not accurate. A blanket claim of compliance is misleading when the company departs from two code recommendations and has not explained either departure. Under a comply-or-explain regime, the obligation is either to comply or to give a meaningful explanation. A statement of compliance without explanation is neither. It conceals material information from investors and regulators and creates a risk of regulatory challenge and investor loss of confidence.
ISO 37000 transparency. ISO 37000's reporting and transparency principle expects governance reporting to be accurate, balanced, timely and sufficient to allow stakeholders to understand how the organisation is governed. It is not satisfied by a compliance slogan. Material departures, the reasons for them, the mitigation in place and the plan to remedy them should be disclosed. The chair's view that explanation would be commercially damaging is not a valid reason to withhold material governance information; the code itself contemplates explanation, which necessarily requires disclosure.
Conclusion. The draft statement should not be published. The board should either amend it to disclose and explain the departures or, if it cannot do so accurately before the deadline, seek an extension. Publishing an inaccurate statement is worse than a short delay.
2. Advise the board on how to address the chair's former role and the audit committee chair's experience in the annual report. What are the realistic options?
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Chair's former role. The chair was CEO until 14 months ago and therefore was not independent on appointment. The board should acknowledge this, explain the succession rationale, set out the chair's current relationships and confirm whether the board considers the chair independent now. Realistic options are: (a) explain the departure and appoint a lead independent director with a clear mandate; (b) commit to appointing an independent chair within a defined period, for example 12 months; or (c) if the board believes the chair is independent now, publish the criteria and evidence and let investors judge. Option (a) is the minimum credible response; option (b) is stronger where investor concern is high. The board should not simply assert independence without explanation.
Audit committee chair. The code recommends recent and relevant financial experience. The current chair does not have it. Options are: (a) recruit a new audit committee chair with financial experience; (b) add a financially experienced independent director to the committee and arrange training for the chair; or (c) explain the departure and set out how the committee obtains financial expertise, for example through the CFO, external auditors and an independent expert. Option (a) is preferable; option (c) is acceptable only with a credible explanation and a remediation plan.
Process. The board should establish independence criteria, review the chair's relationships, minute its conclusions and engage the institutional investor before publication. The chair should recuse from the discussion of his own independence.
3. Set out what a good governance report for Solstice should contain and how the board should assure its accuracy.
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Content. A good report should cover board composition and independence, including the chair's former CEO role and the board's assessment; committee membership, including the audit committee chair's experience and any remediation; the governance framework and how it is applied; risk appetite and principal risks; stakeholder engagement, including the investor correspondence; ethical culture and whistleblowing arrangements; board evaluation and succession; and a clear, specific explanation of every code departure, with mitigation and a timeframe. It should avoid boilerplate and connect governance to the company's purpose and strategy.
Assurance. The audit committee should review the governance statement, supported by internal audit or an independent reviewer for selected claims. Legal counsel should check consistency with the code and listing rules. The company secretary should maintain an evidence file for each statement. The chair and CFO should sign off, and the board should minute that it has reviewed the statement and believes it to be accurate and balanced. If the board cannot obtain assurance before the deadline, it should delay publication rather than publish an unverified claim.
Investor engagement. The board should respond to the institutional investor before the annual report is published, explain the departures and the remediation plan, and report the outcome. Transparency after the event is better than concealment, but engagement before publication reduces the risk of a public dispute and demonstrates accountability.