The Government has announced a new inquiry into the inner workings of the boards of UK companies. We previously commented on Theresa May’s proposals for employee and consumer representatives on boards and this latest inquiry is another demonstration of her Government’s focus on improving corporate accountability and responsibility.
Spotlight on pay, duties and diversity
The Business, Innovation and Skills Committee inquiry will focus on three key areas of executive pay, directors’ duties and the composition of boards. In each area, the inquiry has posed a number of questions including:
- Executive pay
- Should executive pay take account of companies’ long-term performance?
- Should it reflect the value added by executives relative to junior employees?
- Do recent high-profile shareholder actions suggest the current framework is working or do shareholders need a greater role?
- Directors’ duties
- Is current law sufficiently clear on the role of executive and non-executive directors?
- How are the interests of shareholders and employees best balanced?
- Is there an effective voice and challenge to boardroom decisions?
- Board composition
- How could the proposals for workers representatives on company boards work?
- What more should be done to increase the number of women in executive positions?
- How can greater diversity of board membership be achieved?
What are your thoughts on these points? It would be good to hear how you address any of them within your organisation.
Healthy corporate culture is key
The new inquiry comes hot on the heels of a report published by the Financial Reporting Council which showed that a healthy corporate culture was key to sustainable growth and vital to the creation and protection of long-term value. According to the FRC, the board should determine the company’s overall purpose and then ensure that its values, strategy and business model are aligned to that driving purpose. The board must lead by example, embodying the desired culture in every aspect of the business and engaging with a wide range of stakeholders on an open and accountable basis.
The existing duty
Arguably many of the issues being considered by the Committee and referred to in the FRC report are already caught by the existing duty on directors to promote the success of their company for the benefit of its members, taking into account the interests of its wider stakeholders. But there are concerns that this duty is not sufficiently clear and is difficult to enforce – certainly there have been very few cases brought against directors for breach of this duty.
How do you comply with this duty in the day to day management of your business? (Were you even aware it existed?!)
What will it all mean in practice?
The inquiry is due to close on 26 October and it will be some time after that before we see any firm proposals from its review.
It seems likely that any changes resulting from the inquiry or the FRC’s report will be applied (at least in the first instance) to larger listed companies through changes to the UK Corporate Governance Code. That Code applies on a voluntary ‘comply or explain’ basis to companies with a premium listing of equity shares. Smaller private companies will only be affected if changes are made to existing laws, such as the Companies Act 2006, or if new laws are introduced.