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29 Nov 2016 04:12pm

Business welcomes corporate governance debate

The government has finally released its much anticipated Green Paper on corporate governance and revealed measures which, if implemented, will result in the most radical shake-up in corporate culture for at least a decade

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Caption: Business welcomes chance to discuss ways to restore diminished public trust

Launching the paper, prime minister Theresa May made it clear that the status quo was not an option. “For people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public,” she said.

“Where this social contract breaks down and individual businesses decide to play by their own rules, faith in the business community as a whole diminishes – to the detriment of all.

“It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.”

The government is determined to make Britain one of the best places in the world to work, to invest and do business

Business secretary Greg Hands

The Green Paper focuses on three areas of corporate governance where the government thinks there is particular scope to strengthen the current framework. These cover: beefing up the corporate governance framework for the UK’s largest privately held companies; increasing shareholder influence over directors’ remuneration – including better transparency and simpler and stronger long-term incentive plans, and ensuring that the voices of workers and customers are heard in the boardroom.

To date, privately-held businesses have not been subject to as strong a corporate governance regime as listed companies.

However, the paper argues that good corporate governance is about more than the relationship between the owners and managers of the business. “There are other parties with a strong interest in whether a business is well-run, including employees, customers, creditors and other companies in the supply chain.”

It suggests, that if there is support for a stronger framework, then either the largest privately-held businesses should be brought under the existing UK Corporate Governance Code or under a new Code tailor-made to their circumstances.

Interestingly, it names four private businesses as providing examples of good governance – Deloitte, EY, KPMG and PwC, all of whom are bound by the Audit Firm Governance Code.

The code was drawn up in 2010 by the Financial Reporting Council with the help of ICAEW.

As far as executive pay is concerned, the paper seeks to find a balance between ensuring that companies retain flexibility to set remuneration policy and pay that fit their business needs, and listening to the views and concerns of shareholders, employees and other stakeholders.

It is seeking views in particular on strengthening shareholder voting rights, encouraging better shareholder engagement with executive pay, boosting the role of remuneration committees, increasing transparency on executive pay and improving the effectiveness of long-term pay incentives.

In the third area, the paper considers how to ensure that employees, customers and suppliers are all heard in the boardroom. Proposals include setting up advisory panels and appointing designated non-executive directors to take on responsibility for voicing particular stakeholder perspectives.

“The government is determined to make Britain one of the best places in the world to work, to invest and do business, and part of that means continuing to have a framework of corporate governance that is admired across the world,” said business secretary Greg Hands.

“This review will help us achieve that aim and the views of businesses, investors, employees, consumers and others with an interest in successful business are warmly welcomed.”

The business community’s immediate response was to welcome the “open and consultative nature” of the Green Paper and the debate that it will “kick off”.

The Financial Reporting Council, which is responsible for ensuring that listed companies follow the UK Corporate Governance Code or else explain why not, agreed that companies needed to fulfil their responsibilities to a wider range of stakeholders and society and said that it would also be issuing a consultation to address the questions raised by the Green Paper.

“The FRC stands ready to develop and implement these proposals to help support a strong economy and meet the needs of wider society,” it said.

ICAEW CEO Michael Izza described the proposals as "bold but not as radical as they could be". Nevertheless, different groups would find them contentious.

"Senior executives will be concerned shareholders will be empowered to set pay levels, while others will wonder why bonuses can’t be clawed back or why there is no proposal to link pay at the top with pay at the bottom," he said.

"Unions are angry that proposals to have workers on boards have been dropped – in favour of advisory panels for workers and consumers and the allocation of special responsibilities to non-executives.

"Large private companies will be dismayed about proposals about new rules for them, and may argue this has been based on the poor behaviour of a small minority."

Government will have to hold its nerve if it is to see these bold ideas eventually come to life

ICAEW CEO Michael Izza

There would be a lot of work ahead, he added. "Government will have to hold its nerve if it is to see these bold ideas eventually come to life.

"But I firmly believe that in another 25 years we will hold the eventual principles that emerge from this process to be as self-evident as the Cadbury Code is now."

Institute of Directors director general Simon Walker particularly welcomed the emphasis on raising the corporate governance bar for private companies, something he said was “long overdue”.

“There are around 2,500 private firms in the UK which employ at least 1,000 people and the damage that can occur when they are poorly governed can be substantial,” he said. “We welcome the government’s decision to throw its weight behind a code of practice for large unlisted business.”

Investment Association CEO Chris Cummings said the consultation would “allow all stakeholders to offer their views and support the government’s renewed focus on corporate governance to make sure companies are being managed in the long-term interest of shareholders, their customers and employees.”

Josh Hardie, the CBI’s deputy director-general, called for a "comply or explain" approach to employee representation. “Diversity of thought in a company helps improve decision-making and engaged employees are fundamental to business success,” he said.

“Businesses are already ensuring workers’ voices are being heard in many effective ways. While there is no blanket solution, a good starting point is firms being able to ‘comply or explain’ on the approach they are taking – whether that’s employees on boards, employee committees, dedicated representatives, or another model.”

He did express concern, however, about the direction of travel over boardroom pay, especially as listed companies are already transparent about boardroom pay. “Blunt pay ratios ignore the fact that different sectors naturally have a wider range of skills - and therefore pay - than others. This has the potential to be genuinely misleading and so must be thought through very carefully.

But he welcomed moves to tighten up the link between good performance and executive pay. “Businesses shouldn't award exceptional pay for poor performance and shareholders have a key role in ensuring sensible, sustainable and reasonable pay setting policies.

“Introducing a targeted binding vote regime would focus attention on the most concerning cases and give shareholders the teeth to truly have the final say on top executives’ pay.”

British Chambers of Commerce director general Adam Marshall warned against heavy-handed regulation which could reduce investment or create a significant cost burden for companies.

“Reforms need to be proportionate, and businesses will want reassurances from government that any changes resulting from these proposals will not create additional, costly regulatory burdens for medium-sized and smaller companies.”

However, he approved of the moves to increase the variety of voices at boardroom level. “There is a strong case for the interests of employees, consumers and crucially, suppliers, to be represented in some way in corporate board discussions. We are pleased that ministers are looking at a number of different options for making this happen.”

In contrast, TUC general secretary Frances O’Grady said the proposals were disappointing.

“This is not what Theresa May promised. Today’s proposals … will not do enough to shake-up corporate Britain.

“We need the voice of elected workers in the boardroom, rather than on advisory panels.

“The prime minister vowed to govern for working people. She should let them have a say where it really matters.”

O’Grady pointed to a new poll, commissioned by the TUC and conducted by Opinium, which found that six in 10 (59%) people supported the election of worker representatives on to the boards of large companies, while only 10% were against the idea.

The deadline for comments on the Green Paper is 17 February.

Julia Irvine

 

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