Dull but important – why corporate governance matters

September 11, 2017

Signs are just starting to show a new approach to how our major corporations are governed and held to account, says Mike Tuffrey. However few are getting excited about it.

Talk about corporate governance and most people’s eyes glaze over. When the Financial Reporting Council earlier this year announced a fundamental review of the UK Corporate Governance Code – 25 years on from the original Cadbury Report – not everyone cancelled their holidays to await developments.

That proved wise, as true to form, this will be a slow-burn. However some elements are starting to come together. Last week the government announced its approach to some hot topics that featured in political debate around the new prime minister and the general election.

The outcome is less than the hype, also true to form. Mandatory worker representatives on boards have become a choice between assigning responsibilities to a non-executive director, creating an employee advisory council or nominating a director from the workforce, with the only requirement being to ‘comply or explain’. Mandatory annual votes on ‘fat cat’ pay have become a naming and shaming website listing, while publishing high-to-median pay ratios will simply make more accessible data that is largely in the public domain already.

Depending on your point of view, this is either a big climb-down faced with strong corporate lobbying or pragmatic progress towards greater accountability on what are complicated and difficult issues. More significantly, and somewhat lost in the small print, was news of plans to extend corporate governance principles to large private companies, albeit voluntarily, and a further look at the definition of duties of board directors – that’s the potentially radical one.

Meanwhile other changes take effect. My colleague, Peter Truesdale, reports on further tightening to the rules on corporate annual reporting, taking effect this year.

Tweaks to corporate governance rules are one way for governments to nudge better practice; another – more self-evident – way is to impose specific requirements on particular issues.

This week brought news of reporting on modern slavery, where the Chartered Institute of Procurement & Supply says one in three companies are failing to comply with the requirements of the new Act. I’m more positive, as the flip side of those numbers in fact shows a significant and very rapid focus on a difficult issue which will yield serious results in years to come despite the lack of any real sanctions for inaction.

Also to catch my eye was an Economic Times of India story on increased CSR investment due to mandatory reporting against the 2% guideline under section 135 of India’s Companies Act 2013. Here is another ‘comply or explain’ rule apparently causing a 20% increase in spend, and a decrease in companies not complying, albeit still running at one in three choosing to explain.

Yes, I know this isn’t necessarily an increase in activity, some is just better reporting, and it certainly doesn’t mean the spend is getting good results. Still, it has certainly focused minds in the sixth largest economy in the world.

What none of this amounts too is the sort of concerted challenge to the status quo and to conventional assumptions that we saw in the 1990s, that culminated in the Tomorrow’s Company enquiry. The RSA has made a new contribution here, earlier this year, with its Inclusive Growth Commission report, Making our economy work for everyone. This week the IPPR’s Commission on Economic Justice has added its voice, with an interim report Time for Change: A New Vision for the British Economy.

Some companies were directly involved in both these initiatives, which is good. What we lack from the business community as a whole is recognition of the scale of change needed to corporate governance and a critical mass of participation in finding a new approach, fit for the sceptical and challenging age we live in today. Twenty five years is a long time.

Until that emerges, piecemeal changes – dull but important – is the name of the game.

 

Mike Tuffrey is a Co-founding Director of Corporate Citizenship.

 

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