‘Corporate governance’ is a dreary piece of language but it’s also of crucial importance. The way businesses are structured and run fundamentally shapes both their financial performance and (equally if not more importantly) their impact on wider society. In the wake of scandals at Sports Direct, BHS and others, politicians are rightly asking what can be done to make businesses behave in a more responsible way.
This morning a far-reaching report by MPs on the business select committee set out the changes they want to see businesses make to improve fairness in executive pay, diversity and the general behaviour of Britain’s boards. It’s all eminently sensible if a bit run of the mill. The most eye-catching suggestions include:
The scrapping of long-term incentive plans (LTIPs) for senior executives. These are supposed to encourage bosses to avoid chasing quarterly wins and focus on their company’s underlying success, but the report said they can create perverse incentives and that the link between performance and pay remained unclear.
A major diversity push. The proportion of women on Britain’s boards has increased substantially over the past few years but there’s still a long way to go, especially in executive positions. The report urged the government to set a target for the FTSE 350 that half of all new appointments to senior executive positions ought to be women. It also called for ethnic diversity to be given as much prominence as gender diversity.
A bigger role for workers. The Prime Minister dropped her bold plans for putting workers on boards last year but the committee is keen for them to play a more important part in governance, particularly on the remuneration committee – ‘which would represent a powerful signal on company culture and commitment to fair pay.’ The Trades Union Congress (TUC) says it wants this to be mandatory but that seems unlikely to happen for the foreseeable future.
Greater powers for the Financial Reporting Council, Britain’s governance regulator. In particular the committee said the FRC should have the power to enforce section 172 of the Companies Act, which requires directors to have regard for the interests not just of shareholders, but also employees, customers, suppliers, the environment and the company’s reputation.
New rules for private firms. Many of the UK’s most well-known companies are listed on the stock market but there are plenty of large companies that remain in private hands – including Philip Green’s Arcadia, Dyson and the John Lewis Partnership. They’re not presently subject to the same rules as listed firms and nor should they be. But the committee wants the FRC, the IoD and the Institute for Family Business to draw up a new code for large privates to voluntarily sign up to. Should that fail to gain traction then the report suggests new mandatory regulations.
You can read the full report here. Reactions to it have been broadly supportive, both from business groups and the TUC, though the CBI’s boss Carolyn Fairbairn warned that on executive pay, ‘the unacceptable behaviour of the few does not reflect the high standards and responsible behaviour of the vast majority of companies.’
These are just proposals for now – we’ll have to wait and see how the government, which published its own green paper on governance last year, decides to proceed.