In the wake of recent high profile corporate governance failings at BHS and Sports Direct, the Business, Energy and Industrial Strategy Committee (the “Committee”) has published its much anticipated report on its inquiry on corporate governance.
The report considers whether the current UK corporate governance framework is fit for purpose. The report concluded that corporate governance in the UK remains strong and that there is no need for a radical overhaul. However, the report does make a number of recommendations for improvements to the regime:
The Key Recommendations:
Reporting on directors’ compliance with their duty to promote the success of the company: whilst the Committee has not called for any change in the law on directors’ duties, it has suggested that there be a requirement for informative narrative reporting on how directors have complied with their duty to promote the success of the company (this duty is set out in section 172, Companies Act 2006). This requirement would include an obligation on boards to explain (1) how they have considered each of the different stakeholder interests, (2) how this has been reflected in financial decisions, and (3) how they pursued the company’s objectives and had regard to the consequences of their decisions for the long term. Although the current UK Corporate Governance Code is only applicable to companies with a premium listing on the London Stock Exchange, the Committee does believe that there is a case for reporting on section 172 compliance to also be compulsory for private companies.
Voluntary code for large private companies: the Committee has suggested that a voluntary code of corporate governance is published for large private companies (in this context, a “large company” would mean a company with over 2,000 employees). Reporting under the code would be on a comply or explain basis. If this voluntary regime fails to raise standards of governance after an initial three year period, or if there are high levels of non-compliance, then the Committee suggests a mandatory system be introduced.
Greater transparency in governance standards: the Committee proposes that a rating system is introduced which would publicise examples of good and bad corporate governance practice by companies. Companies should be compelled to include their rating in their annual reports.
New gender diversity targets for listed companies: the Committee proposes that the government should set a target that, from May 2020, at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women. If a company fails to meet this target it should include the reasons for failure in its annual report and explain what steps it is taking to rectify gender inequality on its executive committees.
Employees on boards: the Committee urges more companies to appoint employees to boards and believes that it should become the norm. Where an employee is appointed to the board the Committee suggests that they should be a full director, with the necessary skills, rather than merely a representative of the workforce. Although the Committee is in favour of employees on boards, it does not propose a compulsory regime for this.
It remains to be seen whether the Government will adopt any of the Committee’s recommendations. The recommendations do seem to echo some of the recent comments that have been made by senior government figures on industrial policy and strategy and therefore there is a strong likelihood that some of these proposals may be adopted following the impending UK general election.
If you would like help or advice on corporate governance for your company then please contact Stewart Matthews on 0330 0945 500 .