Turkeys Voting Against Christmas: Top City executives consulted on UK corporate governance

July 7, 2020

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2 min read

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What's going on here?

The Institute of Directors (IoD) has tasked a group of City executives with reframing the UK’s corporate governance agenda.

What does this mean?

Corporate governance, according to independent watchdog the Financial Reporting Council (FRC), is “the system by which companies are directed and controlled”. The FRC oversees the application of the UK Corporate Governance Code (the Code), a soft law instrument that prescribes best practice in the boardroom. 

During the pandemic, parliament pushed through legislation which sought to relieve some pressure on company executives. This included relaxing the rules on unlawful trading, which ordinarily impose personal liability where directors of a struggling company cause it to trade irresponsibly (to see our article on that, click here). 

The IoD is an organisation that represents the interests of professional leaders and its latest initiative establishes an advisory board which will steer research into the issues boardrooms will face as society emerges from lockdown. Board members include leading CEOs, alongside regulators and academics.

What's the big picture effect?

The UK’s corporate governance regime is much maligned. A 2018 review blasted the FRC as “excessively consensual”, a perhaps unsurprising characterisation of a regulator that is funded by the firms it regulates.

The FRC is a victim of the framework in which it operates. The UK has a principle-based approach to corporate governance, broadly meaning that there are no hard and fast rules in the boardroom. This is reflected in the “comply or explain” nature of the Code, whereby any derogations from best practice have to be explained in annual reports. 

Public trust in the FRC, and regulators generally, has been damaged by recent corporate scandals, think Carillion and BHS. In response, the UK government has promised to transfer the FRC’s responsibilities to a new body known as the Audit, Reporting and Governance Authority (ARGA). ARGA is still likely to be administering the Code however, so the IoD’s project will have enduring relevance. 

The options for the IoD to explore are myriad. In the press release announcing the new initiative, the IoD hints at progressive reform that places climate change, social impact and the views of wider stakeholders at the centre of boardroom decision-making. One likely area of reform relates to employee representation in the boardroom, which the EU has long-championed and the UK has resisted. Another option would be to move from “comply or explain” to “comply or else”, an approach which would grant shareholders enforceable rights against directors. It does however seem inconceivable that an industry body would promote an approach that will see their members facing more lawsuits. 

Ultimately, even if the IoD’s advisory produces pioneering recommendations, they will require legislative consent to make them a reality

Report written by Sam Denison

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