No time for tinkering: a bold approach is needed

Rachel Reeves MPRachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee writes:

Corporate governance may not feature prominently on the doorstep during campaigning at election time, nor often in party manifestos, but it underpins the working experience of most of us.

Perhaps it is testament to the generally high standards of corporate governance in this country that it is usually little noticed. It is only when things go wrong that people rightly begin to ask questions and examine our rules.

When I was elected Chair of the BEIS select committee in July 2017, I inherited a committee that had made ambitious recommendations on improving corporate governance, following its scrutiny of the collapse of BHS and appalling working practices at Sports Direct. Since then, I have been increasingly concerned that these were not exceptions. We joined with the Work and Pensions select committee to examine the Government-commissioned Taylor Report on the future of work. That inquiry revealed evidence of questionable working practices that were not exceptions to the rule, but were integral to the business model of some companies.

We received evidence about exploitative practices at household names such as Uber, Hermes and Ryanair. Of course, the law can intervene – and in the case of Uber has done so – but it is incredibly difficult for individuals to take their cases to court, particularly when class actions are not viable.  But if good corporate governance was in place, and enforced, there would be no need for the courts. Respect and good treatment of the entire workforce would be ingrained. We cannot allow the unscrupulous to gain a competitive advantage over good employers through failings in our system of corporate governance. That is why it is vital that the Code, and enforcement of it, is robust, and seen to be so.   

Sadly, when poor practices are publicly exposed, the result is often a leap in ministerial rhetoric, but barely a step forward in meaningful action. The Prime Minister spoke powerfully when she was elected about the need to govern in the interests of everyone and to crack down on boardroom excesses. But the Government’s proposals which have emerged have been distinctly underwhelming and, often followed by a U-turn, with Government rowing back on workers on boards, for example. Time will tell whether the three alternatives proposed will succeed in increasing the quality of, and confidence in, decision making in the boardroom. We need to move beyond adversarial approaches to the genuine partnerships that do exist in some of our more advance and enlightened sectors, and are the norm in many European countries.

I would also like to see a much a bolder approach to tackling the gender pay gap, and on curbing excessive executive pay – the biggest cause of distrust in business. The publication by companies of uniform statistics on the gender pay gap and on pay ratios will draw back the curtain a little on pay inequality. In the short term, what is revealed may reveal some uncomfortable truths, and adversely affect trust in business, but publication is a vital first step in addressing the inexcusable gender pay disparities that still exist today. Legislation will always be necessary when boards do not act with the regulators to put their businesses in order but I hope that corporate governance will be a means by which companies themselves act and eliminate unjustified pay inequality.   

Finally, let’s not forget the role of investors in holding boards to account for maintaining high standards of corporate governance. The FRC sets the boundaries, in terms of governance and stewardship, but unless the major investment houses start looking at governance as well as dividends, some boards will be tempted to cut corners to meet short term goals. 

The BEIS Committee is now scrutinising, along with the Work and Pensions Committee, the collapse of Carillion, a corporate disaster with huge implications for both public and private sectors. Whilst it is possible for well-run boards to simply make bad decisions, weak governance has been a feature of most recent major corporate failures. We will be interested to test whether this is the case here. It is not just the internal governance structures of businesses in the dock: it is the regulatory system, and, for many, the whole public-private-partnership business model itself.

After 25 years, the Corporate Governance Code is still needed, and I welcome the update currently underway. It is necessary, but not enough in itself to generate the levels of confidence in business and genuine engagement of the workforce that is essential to our working environment, and to fostering much needed improvements in our national productivity. That requires brave and ambitious leadership and a willingness to co-operate across boundaries to pursue what should be shared goals.

Share