02/12/2016

Regulation is the new reputation

BY Eleanor Leach

“Good corporate governance is about having the right checks and balances within big business to strengthen decision-making and accountability”

The Prime Minister has made it very clear this week that she will continue to pursue the proposed corporate governance reforms in a bid to moderate executive pay and introduce a governance framework for private companies. The UK has always been praised for its strong and rigid governance procedures, it seems therefore only appropriate to maintain these standards and continue ensuring that business is not only succeeding in the economy but is also following appropriate practice.

The Department for Business, Energy & Industrial Strategy (BEIS) have published a consultation paper outlining a number of options relating to the proposed reforms. The paper addresses three areas:

  • The extent to which shareholders can influence executive pay
  • Increased connection between employees and the board room
  • The introduction of corporate governance legislation in private listed companies

It sets out a number of other options in relation to the role of the remuneration committee, transparency on executive pay and long-term incentive plans, and has requested feedback by 17 February 2017.

Shareholder voting is currently advisory, but remains an area of significant public concern as executive pay becomes even more disconnected from the average employee and long-term company performance. The BEIS Green Paper suggests a number of options to address the problem, including subjecting elements of remuneration to a binding vote, introducing stronger consequences for companies whose remuneration report is rejected, encouraging a limit on total annual pay, holding a regular binding vote and strengthening governance to better engage shareholders.

Many businesses are faced with the challenge of overcoming the disconnect between employees and the board, and need to establish a stronger stakeholder voice. Potential reforms include the introduction of a stakeholder advisory board, designating non-executive directors to ensure the employee voice is heard, appointing a stakeholder representative to the board and strengthening stakeholder reporting requirements.

As we seen before, in a bid to prevent any future scandals of a BHS or Sports Direct magnitude, the Government has chosen to regulate again. Now the Prime Minister’s is suggesting that large private companies should be required to meet a minimum corporate governance standard. The standards for public companies are in place as a measure of reassurance to shareholders that companies are being operated in an appropriate way. Despite the differences in the shareholder-management relationship, there is a public expectation that companies will be run in a responsible way, but it seems that left to their own accords, this isn’t always the case and other stakeholders tend to be the most affected. Ultimately, this reform would see the introduction of enhanced standards to ensure that private companies are applying the principles of the UK Corporate Governance Code (the Code).

Following the publication of this report, the Financial Reporting Council (FRC) have revealed that they will also consult to update the Code in 2017, despite their earlier announcement this year that further updates to the Code are on hold until 2019.

Now, more than ever companies should be considering how they are communicating their corporate governance practices, establishing how they can go beyond compliance and demonstrate that they are taking it seriously.

‘Transparency sends out a strong signal about what is important to you as a business. It makes us all accountable…’

Jayne-Anne Gadhia, CEO, Virgin Money

The communication of governance and how boards are engaging and understanding the business is critical, ensuring that all the right checks and balances are in place does not just promote good governance, but also strong and sustainable performance.

It is important to note that governance is not just a hygiene factor and regardless of the steady stream of scandals, boards need to remember the responsibility for a company’s success starts and ends with them. A company’s reputation is hinged on transparent behaviour and communications. Boards should ensure that their disclosures are transparent in a meaningful way, not just for the sake of it and not just to shareholders.

To learn more about our approach to corporate governance and ensuring clarity and transparency in your disclosures, download the latest papers in our governance series. The series seeks to help companies respond to the evolving requirements and navigate the complexities of best practice and regulation.