Corporate Governance for the post-Brexit era

Chris Cummings, CEO of the Investment AssociationChris Cummings, CEO of the Investment Association writes:

As the UK prepares to forge a new role on the world stage as a global trading nation, it is important we remember one of the attributes that has made the UK and London in particular a centre of financial excellence: our internationally respected corporate governance framework.

The publication of the Cadbury Report in 1992 marked the birth of the UK Corporate Governance Code and enshrined the principles-based approach to corporate governance. The dual aim of the governance framework is to “encourage the efficient use of resources and equally to require accountability for the stewardship of those resources”. Those principles have since allowed our country to attract the best global companies to list in London, as well as encouraged international capital to invest in UK-listed companies.

An evolving financial ecosystem

Financial ecosystems are constantly evolving and one of the reasons our country has managed to maintain its good reputation, is that the UK Corporate Governance Code has kept developing over the last 25 years. These continual improvements to the Code, have been driven not just by regulators, but mainly by shareholders and business leaders. Our corporate governance system must continue to change over the years to come if we are to maintain our competitive edge post-Brexit.

Theresa May confirmed the Government’s commitment to reinforcing the UK’s reputation as a global leader for corporate governance by making it a central pillar of her “fairer Britain” bid for the party leadership back in 2016.

A green paper followed later that year - Corporate Governance Reform - recommending a suite of measures to address corporate governance issues in company boardrooms. The Government’s response to the Green
Paper focussed on ways in which the views of stakeholders (particularly employees) could be better heard by Boards and how executive pay could become more closely be aligned to long-term performance.

Whilst the Government has adopted a market based approach for most of these measures, it has also left the door open to further regulation should the current package of measures being implemented not lead to significant change and reform. It is critical that investors and companies work closely together to show that we understand and are acting on the concerns the Prime Minister raised in her first speech on the steps of Downing Street. The Investment Association is actively working with Government to develop market based initiatives to help deliver this ambitious reform package.

New corporate governance measures

One of the Investment Association’s flagship proposals in those new measures is the world’s first ever Public Register of listed companies which have received significant shareholder dissent and to track whether and how they are addressing those concerns.

The Register, which has government backing and aims to launch this December, will include FTSE All-Share companies which have received more than 20% votes against any resolution, at an Annual General Meeting or General Meeting. It will also include any resolutions which were withdrawn by a company prior to the meeting.

By publishing the list of all companies who have suffered significant shareholder dissent in one place, we will more affectively hold big business to account and shine a light on how they are addressing shareholder concerns.

Companies must also do more to ensure that their stakeholders’ voices are heard by the Board.  This means
Directors must fulfil their duties in a way that takes into consideration the impact of a company’s operations or business model on the company’s wider stakeholders. Whilst employees and customers will be common stakeholders to most companies, each company’s stakeholders will differ depending on its size, location and the nature of their activities and business relationships. For the same reasons, the mechanisms used by boards to gain an understanding of the views of their key stakeholders will also vary. Each company’s approach needs also to be tailor made and informed by its purpose, culture and values.

Companies who disregard their stakeholders are unlikely to enjoy commercial success in the long term and worse, in the short term risk damaging their reputation. Stakeholder engagement is an essential activity for all companies. It should be used to inform the decisions companies take, be it about the products or services they provide, or about the long term decisions they take about their workforce and the society in which they operate.

Our joint guidance with ICSA: The Governance Institute identifies ten principles to guide the way boards approach these issues.

The UK’s approach to corporate governance is well respected internationally, but we also need to ensure that it remains globally competitive post-Brexit. The IA’s measures will play a key part in the next stage of the evolution of our corporate governance regime which has deep historical roots, and a strong tradition of market-led best practice. The Government is right: now is a good time to review how the system is working and to ensure it is fit for the twenty first century. And our industry has a central role to play in ensuring the UK corporate governance regime remains one of the jewels in the financial services’ crown.