Article:

Parliament launches corporate governance inquiry

17 October 2016

On 16 September 2016, the Business, Innovation and Skills Select Committee (BIScom) announced an inquiry into three key areas of UK corporate governance. Given Teresa May’s recent statements about reigning in irresponsible companies, it is quite possible that the inquiry will be followed fairly quickly by specific Government action.

Executive pay

The inquiry is tasked with establishing the key drivers for company behaviour on executive pay. It is specifically tasked with investigating the factors that caused the significant rises in executive pay over the past 30 years and whether long-term performance and the value added by executives should be given greater weight when designing pay packages. The Government is looking for ways it could exercise more control of executive pay and (separately) the Prime Minister has already committed to introduce binding shareholder votes in future. The BIScom inquiry will address the practical issues before the legislation is drafted for consultation.

Directors’ duties

The enquiry is to investigate whether director’s duties to promote the long-term success of the company are clear and enforceable and how the respective interests of shareholders, current and former employees should best be balanced. How the decisions of boards are scrutinised, how transparency can be enhanced and whether or not the rules for public and private companies should be aligned are also to be considered. Overall the aim is to come to an assessment of whether the legal roles of directors and non-executive directors are sufficiently clear and whether further duties need to be imposed.

Board diversity

The inquiry will consider all aspects of worker representation on boards, from how it could improve board performance to practical issues such as how the worker representatives would be chosen. Worker representation on boards is a common feature of corporate governance in a number of EU member states’ countries: so it is perhaps ironic that the UK is seriously considering this at the same time as preparing to leave the EU.

Alongside this, BIScom will also examine how to achieve greater diversity of board members (particularly women in executive roles) and whether action in this area should just focus on gender equality or whether other diversity factors such as age, disability, ethnicity and socio-economic background should be included.

Timetable

Although the FRC has only recently updated the Corporate Governance Code (see Business Edge May 2016) it is clear that the Government believes that the chances of more high profile company failures are too high. It seems likely that more prescriptive rules will be introduced in 2017 as part of the Government’s “working for all” agenda.

BIScom is seeking written submissions on these ideas (to biscom@parliament.uk) by 26 October 2016.

For further information on corporate governance issues please contact Scott Knight.

Business Edge 2016 Index