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The water regulator has raised concerns that companies are failing to demonstrate how executive bonus payments are linked to performance.
In an update on board leadership, transparency and governance principles, Ofwat said transparency had improved somewhat, but felt explanations on how payments matched performance were “difficult to understand”.
It found most companies did not demonstrate how dividends and executive bonus payments were linked to delivery for customers. It also expressed concern about a lack of action on conflicts of interest – particularly those relating to significant shareholdings.
Ofwat reported that executive pay policies for 2020-25 met its expectations of being “stretching and substantially linked to delivery for customers”, but by 2018-19 most companies had not yet implemented these commitments.
It said during that period only half the companies’ explanations of payments included consideration of the level of service for customers and performance of the business.
Bristol, SES, Yorkshire, United Utilities and Tideway were praised for their reporting practice.
The report is part of Ofwat’s work to build trust in the water sector. The regulator introduced the principle in April 2019 that water companies have a licence condition to follow.
Ofwat asked for evidence that boards are setting long-term directions and making accountable decisions regarding the company’s regulated activities without conflicts of interests.
The report said explanations from companies about board decision-making had been limited, but it saw an improvement in transparency of reporting of reserved matters.
It praised companies that had taken steps to establish or refresh their social and company purpose but as part of its bid for greater transparency and public trust in the sector asked more to follow suit.
Ofwat said there were “numerous examples of what could be considered good practice which other companies can learn from”.
Adding social purpose to companies’ values is something Rachel Fletcher, chief executive at Ofwat, has championed. The report said it had been acted upon, with the “vast majority of boards” reportedly taking steps towards establishing or refreshing theirs.
Anglian was the first to enshrine it social purpose within its Article of Association, followed by Welsh Water and Severn Trent, while others are considering ways to make social purpose focal to all business activities.
The report said embedding company purpose and values into the culture of a business is “critical to ensuring that the culture of the business delivers the purpose throughout the organisation”.
A full report from companies is due in July.
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