“Good corporate governance is about having the right checks and balances within big business to strengthen decision making and accountability”.
So said Theresa May, UK PM in the foreword of this week’s Green Paper (discussion paper) on Corporate Governance Reform.
That’s pretty much how we describe it too:
Governance is primarily about how firms are run and controlled, and specifically about decision-making. It focuses upon the board and senior management, although management and leadership at all levels are important and part of governance systems. Governance is also concerned with the structures of responsibility and the flows of information. Therefore effective systems and controls to manage governance are vital.
What is Corporate Governance meant to achieve?
Corporate governance is central to the effective and efficient running of any organisation. It shapes everything from long-term direction to everyday operations, and plays an important part in long-term success or failure. So it is a subject of importance to employees and shareholders of a firm and can be seen as a function of internal management.
Also, good corporate governance is gaining a higher profile with other stakeholders who have an interest in evaluating the firm’s performance, impact and standing. Consumers or business partners might well develop an interest in a company’s governance arrangements in deciding whether to do business or while undertaking due diligence, while investors may use some means of governance as a measure for evaluating the wider health and sustainability of a potential investment.
Areas of Focus
The Green Paper ties in well with this view as it focuses on three areas where the UK Government wishes to consider options for updating the (already mature) corporate governance framework:
- Executive pay
- Strengthening the employee, customer and supplier voice
- Corporate governance in the UK’s largest privately-held businesses.
Executive pay is a perennial news item (#fatcats) and the relationship between stakeholders remains an area of priority. The third point is particularly interesting, as it shifts the focus of ‘good corporate governance’ away from its traditional target (listed firms) onto private firms who, according to the report “currently face lower formal corporate governance and reporting standards than many public companies”.
Those of you who follow the ebb and flow of business in the UK will appreciate the strong links to the demise of British Home Stores (BHS) over the summer, which has it seems contributed in part to the prioritisation of this Green Paper. Don’t forget – public opinion drives politics and politics have a habit of driving regulation.
So is this regulation?
Well yes, and in another way, no, not exactly.
As the Green Paper summarises, the UK corporate governance framework is made up of several key pillars:
- A robust framework of company and financial markets law and regulation which promotes accountability and transparency
- A unitary board system which makes directors collectively responsible for the decisions of the board
- The Financial Reporting Council (FRC) UK Corporate Governance Code which sets out good governance principles and practices on issues such as board responsibilities, composition, remuneration and shareholder relations. (This applies to leading listed companies on a “comply or explain” basis and continues to evolve in line with emerging good practice)
- The FRC’s Stewardship Code, which sets out the principles of effective stewardship by investors.
Is it legislative? That’s a different question altogether. And it seems that additional legislative power is not something the Green Paper is especially keen to mandate:
“Where there is a view that change is appropriate it may not be the case that regulation by Government is needed to secure it. One of the strengths of our system of corporate governance has been the use of non-legislative standards adopted by business itself.”
So on the one hand, the Government is keen to do something to raise the standards. But not so keen that it wants to get directly involved (like when you tell your children who are arguing over a toy ‘sort yourselves out or I’ll sort it out for you’).
Feedback on the Green Paper has been mixed, seeing some describing the proposals as ‘watered down’, with the PM under pressure from big business.
On that note, let’s hand back to Theresa May to close: “This is an important task, and one where both the Government and big business must rise to the challenge of restoring faith in what they do, and in the power of the market economy to deliver growth, opportunity and choice for all.”
Surely we can all agree on the importance of that. Now let’s try and see it through?
You can learn much more about the importance and benefits of good Corporate Governance in the ICA Specialist Certificate in Corporate Governance. Click here to find out more.