Two cheers for Green Paper on Corporate Governance Reform

Two cheers for the Government’s Green Paper on Corporate Governance Reform published last week. The first is for indicating that ‘we need to support strong businesses that focus on long-term value creation and command public confidence and respect’.The second is for focusing on strengthening the employee, customer and wider stakeholder voice in a relatively broad and open-minded way and moving away from the idea of compulsory employee directors just as it has implicitly accepted that there are no silver bullets when it comes to addressing the vexed issue of executive remuneration.

The missing cheer is because it has not grasped the opportunity to take a thorough look at how changes in corporate governance and investor stewardship could help facilitate a real drive by UK listed companies towards striving for long-term sustainable success which brings benefits to all their stakeholders and wider society.

It will be a quarter of a century next year since the Cadbury Report was published leading to the world’s first corporate governance code and it is therefore timely to stand back and consider the future direction of corporate governance in the UK over the next two decades and more. We believe such a review would best be undertaken by a Corporate Governance Commission with representatives from all stakeholder groups, including directors, investors, employees and customers to enable us to move strongly towards a sustainable success model and consign the last vestiges of short-term shareholder value maximisation to history. In our opinion key areas for consideration by the Commission should include the importance of:

  • having a clearly articulated and inspiring purpose that is aligned to a well developed long-term strategy;
  • ensuring a strong focus on setting the right ‘tone from the top’ with an emphasis on running the business in accordance with clearly articulated values;
  • achieving the fair treatment of all stakeholders and quality engagement with them;
  • promoting a culture of innovation throughout the business which may be incremental and/or transformational depending on the circumstances; and
  • being led by an ‘engaged board’ with a diverse membership with the necessary skills and experience providing the right levels of challenge and support to the executive team.

The best way of embedding effective employee engagement throughout the business is likely to vary by company depending on the industry and geographical markets in which it operates as well as its own culture but focusing on this broader issue is likely to yield greater gains than would have an approach of compulsory employee directors.

On executive pay, we really do need to go back to the drawing board and consider how we can address the issue in a way which commands broad support amongst stakeholders and stops it consuming so much of the time investors spend in reviewing a company’s performance and engaging with its board. Numerous attempts to address the issue from the Greenbury Report in 1995 onwards have still left it high on the agenda of concerns so just increasing the number of binding votes is unlikely to have a huge impact.

In overall terms, we rightly pride ourselves on having a corporate governance code that is well respected internationally but, in assessing its effectiveness, recent events have highlighted that we need to look at a wider range of measures than we have until now. We must go beyond just looking at the robustness of the code in setting out expectations on the composition of boards and also look at the results our listed companies secure, including on profitability and with regard to it being accepted that business is making an important contribution to society. Other useful measures for individual companies and the listed sector as a whole might include the level of increases in productivity and the investment made in research and development as well as the relative share of value added distributed among employees and investors and, within the employee group, how pay levels are determined from the bottom to the top of the organisation.

This is a big agenda but the prize of having a vibrant economy in which business is seen as making a vital contribution to society makes it one worth pursuing.

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