Recent corporate governance failings at high-profile companies have further dented the British public’s trust in business and raised questions as to whether existing standards are fit for purpose. In light of this, the UK government has launched a consultation seeking views on how to improve the country’s corporate governance framework.
The government’s proposals are outlined in a green paper published by the Department for Business, Energy & Industrial Strategy (BEIS). Areas covered by the proposals include executive pay, strengthening employee and customer representation, and whether – and to what extent – large, private businesses should meet higher minimum corporate governance and reporting standards.
“While businesses provide employment for millions of people and contribute £140 billion a year in taxes for public services, confidence and trust in business could be improved if more boards took wider employee and other interests into account, planned and invested for the long-term, and ensured that executive pay genuinely reflects business performance,” BEIS said in a statement.
The consultation process is part of a Parliamentary Committee Inquiry on corporate governance. The department invites feedback and examples of best practice from businesses, investors, employees, consumers, and others. The deadline for submissions is February 17th.
Standards for privately held businesses
Questions posed in the green paper include whether a bespoke governance code should be created for unlisted companies, as well as whether company size of more than 1,000 employees is an appropriate threshold for such a code. The possibility of extending nonfinancial reporting requirements is also explored.
In its response to the parliamentary inquiry, the Chartered Institute of Management Accountants (CIMA) recommended that private companies whose activities are in the public interest be included in the scope of Financial Reporting Council oversight. CIMA is a publisher of CGMA Magazine.
Gareth Thomas, director of business ethics advisors and consultants Good Corporation, welcomes the idea that good governance standards should be applied across the board and notes that applying standards to companies by size, rather than whether they are publicly or privately held, is a more sensible and consistent approach. It is already being applied to nonfinancial reporting requirements such as the Modern Slavery Act.
Privately held companies with an interest in reputation are already applying many of the relevant aspects of the UK Governance Code (though only listed companies are required to do so) and seeking out best practice, whether on their own or as part of a sector-wide initiative, Thomas added.
The consultation sets out the following options designed to strengthen stakeholder voice: Creating stakeholder advisory panels, appointing stakeholder representatives to boards or alternatively appointing existing non-executive directors to represent particular groups at board level, and increasing reporting requirements in the area of stakeholder engagement.
“Encouraging directors to liaise with advisory panels which include stakeholder representatives is a really important initiative and something that could really help achieve better engagement,” Thomas said.
For this engagement to be meaningful, the proposed advisory groups must be truly representative. For instance, an employee group should have a fair representation of employees of all levels on it, not just management.
It is crucial to the credibility of such initiatives that if management feel that it is not in the company’s best interest to take any of the issues raised forward, then they should say why not. If stakeholders sense that no action is ever taken, the panel will become counterproductive.
Increasing employee voice could also help boost productivity – which has been a common problem for UK businesses in recent years. In organisations that gauge employee views and are seen to take action based on the results, “employees feel more engaged in the running, evolution, and efficiency of the business, and are more productive. They also feel they know what is going on and can contribute to the success of the company in a more constructive way,” Thomas said.
Business and society
Given that the stated objective is to build trust between business and society, it is curious that the green paper does not touch on the broader societal impact or the impact on local community explicitly, Thomas observed.
“We feel the government should be looking at encouraging organisations to review and assess the impact of their business on their different stakeholder groups – showing what they do to measure and monitor it, what actions are taken to improve it,” Thomas said. Demonstrating improvement over time is a significant step towards the objective of rebuilding public trust.
The green paper does not address the issue of board diversity in depth. However, businesses would benefit from involving people from wider interest groups and social pools so that they have people at board level who understand the employee voice and the customer voice in the absence of actual representatives of those groups on the board, Thomas said.
In its response to the parliamentary inquiry, CIMA also highlighted this issue: “The composition of boards should have the diversity of skills to effectively govern, develop, and implement strategy.” To address this, CIMA proposes that governance reports include a section which sets out the basis on which board members were selected to meet the skills required.
—Samantha White (email@example.com) is a CGMA Magazine senior editor.