ICSA initiates governance sea change

At the end of January, the Institute of Chartered Secretaries and Administrators (ICSA), along with the International Corporate Governance Network (ICGN), the Institute of Directors (IoD), and the Trades Union Congress (TUC)—a group that, even a few years ago, would have been seen as an unholy alliance—sent a letter to Prime Minister Theresa May calling for a major overhaul of the U.K. corporate governance system (their major requests are given in the sidebar box).

Then, at the beginning of February, ICSA put out a poll questioning whether the U.K.’s system of corporate governance was fit for purpose. A significant proportion of corporate governance practitioners said it was not. When asked if the current system was working, 45 percent are on the fence with a “maybe” response, 16 percent feel that the system is not working, and 39 percent feel that it is.

Some respondents felt that there were too many conflicting pressures and influences on boards for the system to work properly, as well as unrealistic expectations over board achievements as well as too little time to accomplish them. Others said the system “seems to be in constant change with little time to evaluate the impact of change prior to the next move.” The topics that respondents said required most attention were remuneration, simplifying the code and applying similar rules to governance in private companies. The most unifying plea was the need for simplification, for some deregulation and for a period of calm to “let things settle so that effectiveness can be evaluated rather than constant change.”

“Edelman released its annual Trust Barometer which shows that we are experiencing a calamitous collapse in trust in many of the institutions that shape our society. Trust in the U.K. is at a historic low on the Barometer, at 29 percent. Attitudes to institutions are no longer defined by left, right or centre, but by a political realignment around those who have ‘faith in the system’ and those who don’t.”
Sir Win Bischoff, Chairman, FRC



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Then on the 15 February, ICSA launched its “Future of Governance” initiative at the House of Lords. At the launch, Simon Osborne ICSA chief executive, said: “So many times in recent years, governance ‘enhancements’ have been developed from the existing regime and yet, so often, we find ourselves saying ‘if I wanted to do x, I wouldn’t start from here.’ Is it time to review the system from scratch? Have we tweaked it enough? Does the governance system which we have in place deliver the outcome that we want? If not, what do we need to do about it?”

ICSA RECOMMENDATIONS FOR PM

The excerpt below is from ICSA’s letter to Theresa May.
Stress the importance of Section 172 of the Companies Act, that requires directors to promote the success of the company for the benefit of shareholders, and in so doing to have regard for the interests of workers, consumers and other stakeholders.
Create a mechanism which allows those whose interests should supposedly be protected by the law, to make complaint and find an appropriate remedy.
Ensure investors and stakeholders are involved in the governance of that mechanism.
Strongly encourage, or mandate larger private companies to apply the principles of independence and transparency which have worked for public companies.
Help encourage frameworks for executive pay which are more broadly acceptable, and recognise that it, like other aspects of corporate governance will require a long-term focus, by directors, investors, stakeholders and government.
Source: Letter to Theresa May from ICSA, ICGN, IoD, TUC




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Another important participant at the event was Sir Win Bischoff, the chairman of the Financial Reporting Council, the current holders of the keys to U.K. corporate governance. His concluding comments in a speech at the launch were: “With all this in mind, prior to public consultation later this year, we will conduct a review of the current U.K. Corporate Governance Code. This will consider the appropriate balance between the Code’s principles, provisions and guidance. In pursuing any changes, the current strengths of U.K. governance, the unitary board, strong shareholder rights, the role of stewardship and the ‘comply or explain’ approach, must be preserved we believe.”

The evening’s remarks were brought to a close by Chris Hodge, ICSA Policy Adviser, and author of the first in a series of white papers examining the current state of governance and how it could be improved. Hodge compared the initial impetus of the first governance code in the U.K., The Cadbury Code, with the expectations of the code placed on it by the government’s recent Green Paper. “So, in the last 25 years,” said Hodge, “the purpose of corporate governance has gone from ‘better oversight’ to ‘saving capitalism.’ That is a much bigger job—for boards, but also for the regulatory framework.”

“So in the last 25 years, the purpose of corporate governance has gone from ‘better oversight’ to ‘saving capitalism.’ That is a much bigger job – for boards, but also for the regulatory framework.”
Chris Hodge, Policy Adviser, ICSA: The Governance Institute

Hodge thinks that the current system is capable of raising standards of reporting and oversight, “strengthening decision making and accountability.” But that “an approach based on standard setting, reporting, and shareholder enforcement” is insufficient to deliver what he calls the “public interest objectives: restoring faith in business and delivering growth, opportunity, and choice for all.” He highlights its three greatest downfalls:

It’s not good at punishing bad behaviour

The responsibility for looking after the public interest isn’t something you can or should delegate to shareholders

It only applies to listed companies

Action items to detangle governance

rethinking our policy approach to issues such as income inequality, tackling them across the economy as a whole using tools better suited to the purpose
promoting good governance standards in all sectors, and in other investment asset classes that receive a significant amount of money from U.K. investors
improving the effectiveness of the various mechanisms by which listed companies are held to account
introducing effective legal sanctions to punish bad business behaviour
Source: The Future of Governance - Detangling Corporate Governance

Some of his solutions to these problems are given in the sidebar box, but he believes that the different objectives attributed to governance must be untangled and dealt with differently. Above all, there need to be more effective sanctions against misdemeanours. Simply reporting on something or being able to vote on it is not sufficient to bring about change, he concludes, pointing at executive remuneration as the great unsolved problem, despite 25 years of regulations and disclosures and discussion papers and recommendations and shareholder voting.