April 12, 2017 Time to act on Corporate Governance
It’s time for directors “to take more seriously their duties to comply with the law and the Code relating to corporate governance.” That’s the opinion of Parliament’s Business, Energy and Industrial Strategy Committee as a result of its review into corporate governance. Whilst acknowledging the continuing benefits of the comply or explain code, the committee is concerned both about the lack of trust in public corporations and what it sees as increasing pressure for businesses to deliver short-term gains rather than long-term stability.
The committee’s report is part of an ongoing review into the UK’s corporate strategy which includes an enquiry into the future world of work and a response to the government’s industrial strategy green paper. In forming its report the committee has taken written evidence from 170 organisations and individuals supplemented by oral evidence given by a cross-section of those who submitted written opinions.
The conclusions of the report are wide-ranging; encompassing areas such as organisational culture, employee engagement, diversity, director remuneration and investor influence. This has led the committee to recommend the instigation of informative narrative reporting which requires boards to explain how they have considered stakeholder interests including that of employees, customers and suppliers. The instigation of stakeholder advisory panels is also recommended alongside a move to make investor forums more proactive.
As a result of its investigations the committee recommends that the FRC’s powers are strengthened in order to engage and hold company directors to account. Acknowledging that engagement is the preferred route, the committee does recommend that where it is unsuccessful the FRC should be given authority to instigate legal action against directors in respect of a breach of section 172 duties.
Section 172 highlights the duty which a direct has to promote the success of a company whilst having regard to areas such as the long-term consequences of decisions, the interests of employees, the need to foster business relationships with suppliers, customers and others, and the impact of the company’s operations on the community and environment.
Commenting on the recommendations committee chair Iain Wright MP said that “The UK corporate governance system is recognised throughout the world as of high quality” but that following recent scandals, concerns over executive pay and rising stakeholder expectations “corporate governance needs to evolve to provide assurance to investors and wider society.”