After appearing before the Business, Energy, and Industrial Strategy (BEIS) Committee investigating corporate governance, Stephen Haddrill, CEO of the Financial Reporting Council (FRC), wrote with a list of recommendations:

Change the Corporate Governance Code so that companies must explain how they have taken the interests of shareholders into account; a requirement of Section 172 of the Companies Act

Change regulations on corporate reporting so large private companies must comply with this also

FRC to develop a governance code for private companies, with regulatory underpinning to require a comply or explain approach

FRC to be given powers to monitor all governance information, not just the strategic report and financial statements

FRC to develop an enforceable code of conduct for directors, with statutory provision for their oversight

FRC to be given authority to take action against directors for breaches of integrity and reporting duties

Haddrill’s appearance was on 15 November, along with two other groups that gave oral evidence on that day, while other hearings were held on 23 November and 6 December. Sessions were generally around three hours long. There were also 150 submissions of written evidence from most of the witnesses plus everyone from Oxfam to corporations to professional associations. Subjects discussed in the hearings included:

Section 172 of the Companies Act 2006

U.K. governance in general


Private companies

Executive pay

Section 172 and U.K. governance

Section 172 was described generally as well formulated, but the symptoms it was supposed to address have not been made better. The Section was summarised as requiring directors to serve the long-term interests of the company and its stakeholders and deliver fair and sustainable returns to shareholders; with the former being the most important.

Committee member Michelle Thompson—who seemed a little annoyed at panel after panel saying that governance is working well—voiced the first of many concerns that there had been no prosecutions under Section 172. Apart from the FRC’s proposals, however, there was often not much interest in bringing further enforcement, particularly against directors. But a later panel of lawyers and ethics directors noted that there are no penalties for not complying with Section 172 and there have never been any derivative actions from shareholders. But, it was asked, how would they know that a company was not complying with the law? There was wide welcome from the panel that followed Haddrill’s presentation for further enforcement duties and responsibilities for the FRC.

“Reams of guidance going out does not mean that reams of guidance is being read, accepted and acted upon."

Peter Kyle, Member, BEIS Committee


Kerrie Waring from the International Corporate Governance Network (ICGN) wanted: “a statement of disclosure against 172.” But he was also concerned that such a statement would be boilerplate and that there would need to be a regulatory body with inspection powers. In another session Jonathan Chamberlain from the Employment Lawyers’ Association also suggested, to wide accord, “a widely shared statement about how companies have carried out their duties under Section 172, that would raise awareness [of it].” But this should not simply be about compliance, but ‘how they achieved’ their duties. Edelmans’ panel felt that the corporate governance situation regarding shareholders was working well but that boards are ignoring other shareholders in contravention of Section 172.

In another hearing, Oliver Parry of the Institute of Directors said: “We have, certainly in the FTSE 100 at least, developed a very compliance-driven mind-set. You have a code system, you have mountains of regulations on companies—not just banks but all FTSE 100 companies have to deal with. You get the impression there is a lot of box ticking going on.” He referred back to the Cadbury Commission of 25 years ago, the birthplace of U.K. governance, which concluded that governance is more about behaviours. “It is quite possible that you can tick every box in the U.K. corporate governance code, which includes aspects about CSR [corporate social responsibility], but still there can be massive corporate governance failing. That shows that it is beyond compliance. While the project on culture is absolutely welcome, we have a long way to go. It is much more than just ticking boxes.”


Below are BEIS governance investigation terms of reference from Parliament.
Directors Duties
Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
Is the duty to promote the long-term success of the company clear and enforceable?
How are the interests of shareholders, current and former employees best balanced?
How best should the decisions of Boards be scrutinised and open to challenge?
Should there be greater alignment between the rules governing public and private companies? What would be the consequences of this?
Should additional duties be placed on companies to promote greater transparency, e.g. around the roles of advisors. If so, what should be published and why? What would the impact of this be on business behaviour and costs to business?
How effectively have the provisions of the 1992 Cadbury report been embedded? How best can shareholders have confidence that Executives are subject to independent challenge?
Should Government regulate or rely on guidance and professional bodies to ensure that Directors fulfil their duties effectively?
Executive pay
What factors have influenced the steep rise in executive pay over the past 30 years relative to salaries of more junior employees?
How should executive pay take account of companies’ long-term performance?
Should executive pay reflect the value added by executives to companies relative to more junior employees? If so, how?
What evidence is there that executive pay is too high? How, if at all, should Government seek to influence or control executive pay?
Do recent high-profile shareholder actions demonstrate that the current framework for controlling executive pay is bedding in effectively? Should shareholders have a greater role?
Composition of Boards
What evidence is there that more diverse company boards perform better?
How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age, sexuality, disability, experience, socio-economic background?
Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?
What more should be done to increase the number of women in Executive positions on boards?
Source: Parliament

Parry and his panel, indeed most of the panels, though not, for example, some of the corporate witnesses, were in favour of workers’ representatives on boards. But most felt that it should not be introduced via the governance code, but by regulation; unfortunately this is one of the items that had been promised by Prime Minister Theresa May but subsequently sidelined in the green paper. However, all felt that the U.K. should retain its unitary board. There were also several discussions of new initiatives on diversity and widening the pool of talent for non-executive directors.

Finally, as a consequence of the self-dealing activities of advisers in the BHS acquisition, many witnesses called for significantly more transparency surrounding M&A advisors. And that they should be incentivized for the outcome of the deal not just the deal being done.


Shareholders were noted as clearly one of the problems by several panels. Catherine Howarth, CEO of ShareAction said: “In practice, a lot of fiduciary investors continue to think that they have a single overriding duty to maximise short-term profitability ... There are very weak processes of accountability within the investment chain to actual, real pension savers, in the real economy, who absolutely have a long-term need and perspective. They have no voice, at all, in the system, and no ways of holding the investors who act on their behalf accountable.” She also made reference to the Financial Conduct Authority’s recent devastating criticism of the asset management industry published on 18 November this year, as well as a call for pension fund annual general meetings so that investors could have a voice about how their shares were being voted. Howarth also called for a legal regime for investors’ duties, referring to recommendations from the U.K. Law Commission. Such a regime was suggested to the government, which consulted on it, received a great deal of positive feedback but then failed to act on it.

Queen Mary University’s Professor Vanessa Knapp offered some possible solutions: “The Financial Reporting Council is already tiering people who have signed up to its stewardship code, and that will encourage people to aim to be in tier 1. The people who are in tier 3 are going to have to do something or they will not be allowed to remain signatories.”

The Corporate Governance Code, interestingly, is reviewed very regularly, but the Stewardship Code that applies to investors has barely been looked at since it was introduced in 2010. And Knapp added that while tiering is a great idea, it is not enough. “A truly effective stewardship code would recognise that institutional investors are very often agents, and they in turn need to be accountable to the real principals, the real risk takers,” she said.

Private companies

Given that most of the governance scandals lately in the United Kingdom have occurred in private companies, there was some questioning about how a code could be applied to them. Parry noted that the IoD had already put together a specific code for private companies, but that, of course, it was entirely voluntary. There was some disagreement that the existing corporate governance code should be applied to private companies because they are already doing a lot of the reporting that stakeholders need to see. On the other hand, Janet Williamson of the Trades Union Congress, said there was very little awareness of Section 172 in the lower half of the listed sector and practically none at all in the unlisted sector. Haddrill indicated—as has been already noted—that he felt that the FRC should be given powers to regulate and enforce in the private sector. This was backed up by many witnesses with the feeling that ‘comply or explain’ simply would not work in unlisted, private companies.

Executive pay

Almost every panel had an opinion on executive pay reform, with some spending almost their entire time on it. Looking at one of the government’s green paper recommendations, one panel was deeply divided on the prospect of a shareholder remuneration committee, Paul Lee, Head of Corporate Governance at Aberdeen Asset Management was worried that it took power away from directors and undermined their authority. But Cliff Weight, a director at ShareSoc—which represents individual shareholders—thought the prospect was a positive move. A discussion surrounding CEO pay was the main focus of a committee that included Amra Balic from BlackRock, Jan du Plessis, chairman of Rio Tinto, Sir John Hood, chair of the remuneration committee of WPP, whose remuneration policy has been oft bloodied by shareholders and the general public, and Helena Morrissey with the Executive Remuneration Working Group.

There was widespread agreement that executive pay was in trouble—though du Plessis and Hood both thought it was functioning perfectly at their companies. Morrissey pointed to data in the green paper that showed that the FTSE is trading at roughly the same levels as it was 18 years ago and over that period executive pay had more than trebled, “which obviously suggests that there is a lack of [pay/performance] alignment,” she said, adding that there was major distrust between big business and society on this issue. Balic agreed that there are problems in complexity and the pay/performance link but that boards “need to own pay.” She added that BlackRock will be voting against committee chairmen going forward “if we feel there is a disconnect between pay and performance.” But Balic also pointed to problems with remuneration consultants, related to who is paying them, how they encourage firms to chase the median and offer standard boilerplate remuneration policies.

Balic added that letters were going out to 350 U.K. companies warning of votes against heads of remuneration committees if pay is not related to performance. But Morrissey asked: “Is it boards?  Is it remuneration committees?  Is it executives themselves?  Is it shareholders?  Is it the shareholder advisers?  Is it government for not regulating?  Pay consultants?” She answered her own question, saying it is all of them, but they all want to point the finger at someone else. She did not think, however, that the green paper would prevent the problems of the last two years and commented that she did not want to be sitting here in two years’ time having the same discussion.

Stefan Stern of the High Pay Center agreed with Morrissey that it was a systemic problem, but felt that suggestions in the green paper—pay ratios, binding votes, employee representatives on remuneration committees—would help. Stern said: “I think it would have been extremely helpful to BP if a couple of people from an oil rig had been in the room when Bob Dudley’s proposed pay package was being discussed, because they would probably have asked some fairly straightforward questions.”

However, on pay ratios, Professor Charlotte Villiers of the University of Bristol Law School said: “Evidence suggests that some companies are selectively looking at particular kinds of employees, or even geographically selecting. In the end, what we are seeing is compliance or creative compliance, rather than really complying with the spirit of what we are trying to do here.” 

“We should not be pretending we have a science when we really have an art and we do not think that you can gain trust if you just copycat somebody else’s scheme and pretend it suits your own business.”
Helena Morrissey, Executive Remuneration Working Group, on pay

Dr. Hans-Christoph Hirt from Hermes thought that it was more of a complexity problem, that “no one being paid understands why or how.” He offered two solutions, a move towards more fixed pay. which would mean less pay, or “just being honest about the total potential figure ... What we were suggesting is paying much more fixed, paying part of this in shares and having probably just one incentive scheme, and focusing not on TSR or EPS but factors that take into account performance for stakeholders.”

Peter Montagnon of the Institute of Business Ethics said there was a complexity and valuation problem: “the share schemes cannot be valued, the executives do not know what they are getting and, indeed, because they do not know what they are getting and are suspicious of it, they always ask for more. The people who are handing it over do not really value it or cannot easily value it. The shareholders are voting on the outcome from an even greater distance.”

He also voted for a cash-based package that should then be partially transferred into long-term shareholdings so that executives’ “wealth factor” could be tested against the company’s fortunes. “We need to stop doing sticking plaster stuff, stand back and work out a better system,” he said.

Moving into the real world, there was a barbed exchange between the chair of the committee, Iain Wright, and du Plessis. Wright asked why, when the stock price had fallen by 9 percent, did the CEO of Rio Tinto get a pay hike of 25 percent. Du Plessis responded with an “it’s not that simple” answer that boiled down to “we did really poorly but not as poorly as the rest of the mining sector.” Wright did not accept the answer and pressed further about a “safety first” metric attached to the incentive scheme at the mining company. He was not happy that because ‘only’ four people died from accidents, the safety bonus was reduced from the maximum but it still paid out. Du Plessis argued that accidental deaths had been being reduced over a long period but that it was just “chasing political correctness” to pay out only when there were no deaths.

Another hearing will be held on 20 December this year.