A Manifesto for Corporate Governance
In the run up to the general election, the Institute of Directors (IoD) published its own 10 policy manifesto on Corporate Governance, largely due to the fact that not being an automatic vote-winner, the issues “feature very sparingly” in the major political parties’ manifestos. We look at how some of these initiatives can provide a blueprint for companies needing to improve their own governance.
Can these initiatives be delivered?
The manifesto offers mechanisms which avoid heavy regulation but will help regain and strengthen public trust in the business sector. According to the IoD the proposals illustrate how corporate governance can be used to address wide ranging issues from improving accountability of businesses to the all-encompassing challenge of climate change.
As expected, the Conservative manifestoand subsequent Queen’s Speechdelivered to Parliament on 19 December 2019 did not dedicate much policy focus to corporate governance except for further development of proposals on company audit, corporate reporting and a stronger regulator following independent reviews delivered in 2018.
In its response to the Queen’s Speech, the IoD was pleased to see that its own policy to “deliver proposed reforms to the regulation of auditors”would be reflected by the Government moving forward with proposals to reform the accounting regulator. However, the IoD remained concerned “that such a regulator would not be a good fit for either the Corporate Governance Code or the Stewardship Code”and further that governance can occasionally appear simply as “an adjunct of the accountancy profession” with the risk of moving more and more towards a heavily legalistic, regulatory approach lacking flexibility.
Despite the lack of other corporate governance developments in the current Government’s plans, presumably the IoD will continue to lobby for further reform and actions to strengthen UK Corporate Governance and rebuild trust in business. In the meantime, we look at some of the IoD’s policy initiatives and what boards can start to do to improve governance within, and thereby strengthen trust received from their own stakeholders, even if UK-wide reforms may be some way off.
Support the development of an industry-led Code of Conduct for Directors
Directors as a professional group do not have a formal code of conduct to guide their behaviour and the IoD strongly advocates for a framework of conduct similar to those already in place for the medical and legal professions (amongst others).
Here at Bridgehouse, we have always recommended and encouraged the boards we work with to adopt a suitable Code of Conduct which goes over and above the legal duties found in the Companies Act and other regulation, focussing on behaviour, conduct and accountability. Whilst directors should be fully aware of their legal responsibilities and duties whilst acting as a director, there is often little to guide them on the expected conduct and input required in the boardroom itself.
Developing a clear and supportive code of conduct that is agreed by the board is a constructive way of ensuring that all directors know the standards expected of them in office, improving consistency, optimising the output of board meetings and decisions and strengthening trust from shareholders, employees and other stakeholders.
Increasing competence and professionalism
Two of the IoD policy initiatives are designed to achieve improvements in competence and professionalism of UK board members – mandating minimum requirements for director training and adopting a code of practice for board evaluation.
With so many professions requiring minimum standards of training together with continuous professional development (CPD) requirements, it is somewhat surprising that almost anyone over the age of 16 can become a director of a company.
Whilst the IoD initiative focuses on mandated training for newly appointed directors of significant entities, Bridgehouse strongly recommends that all boards of companies big enough to have employees that hold regular board meetings should consider the training requirements of their board members, including both induction training and ongoing refresher training. Directors have such wide-ranging responsibilities from those imposed by company law through to data protection, employment and health & safety duties to name but a few. We therefore consider it imperative that directors are aware of the responsibilities that they hold and receive appropriate training either individually or as a whole Board.
The IoD would like to see a voluntary Code of Practice for the providers of board evaluation services to strengthen consistency so that such evaluations provide better value to stakeholders. The UK Corporate Governance Code requires those companies subject to it, to carry out an independent board evaluation at least every three years.
Whilst evaluations are not compulsory for those not required to adopt the Code, we strongly agree with the IoD that “independent board performance reviews allow boards to continuously improve their own performance and the performance of the company”.Effective board evaluations should assess both individual director performance and how well the board works together and should result in a set of collective and individual targets to ensure that the board operates with maximum efficiency and effectiveness, together with learning and development plans for individual directors.
Long term sustainability
Four of the IoD’s policy initiatives aim to encourage a longer-term, sustainable approach to business behaviour, a common theme through corporate governance best practice and one which Bridgehouse fully subscribes to.
The IoD talks about the effect of the Companies Act 2006removal of the required Objects Clause from a company’s Memorandum of Association which defined the scope of the company’s business and how it still believes that an objects clause or ‘business purpose’ statement is a valuable feature allowing companies to “communicate their expected social impact beyond merely maximising profits.”
This can be delivered through a defined Mission or Vision statement and set of values which help communicate what your business intends to achieve and how it will do it in a focussed and ethical way. Your vision and values should be the basis for planning, monitoring and reviewing all activities including expenditure, policy and decision-making. This should also be supported by an appropriate Corporate Social Responsibility policy, outlining your commitments to the environment and wider society.
The IoD wants to see a more consistent approach to climate-related corporate disclosures. The human-impact on the world’s climate and environment is now impossible to ignore and all businesses need to think about their own environmental contributions and what measures should be taken to reduce negative impact. Not least because customers are becoming increasingly interested in how seriously the organisations they do business with take their environmental responsibilities. The time has come where some customers will go elsewhere for their goods and services purely based on how a business treats (or is perceived to treat) the environment.
All boards are therefore encouraged to set environmental policies and targets to ensure that they are aware of and are minimising any negative effect on the wider environment.
Taking the initiative
It is important that lobbying bodies, such as the IoD, continue to work together to help strengthen the Corporate Governance framework across the UK, to influence government and help strengthen public trust in business. However, we strongly believe that boards should continuously look to strengthen their own governance practices, which will not only improve their own outcomes and profits, but will collectively contribute to improved governance across the UK. Boards and their directors shouldn’t wait for government regulation but should be striving to achieve optimum governance across their organisation.
Help where you need it
Bridgehouse Company Secretaries are experts in governance and provide a range of governance support and services to help your organisation achieve optimum governance including: independent governance reviews; board evaluations; bespoke board member training; and assistance with corporate policy including social responsibility.
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IoD Manifesto https://www.iod.com/Portals/0/PDFs/Campaigns%20and%20Reports/Corporate%20Governance/IoD%20Manifesto%20-%20Corporate%20Governance.pdf?ver=2019-11-19-082215-783
Ibid. Page 44
IoD Manifesto. Op. Cit. page 4
IoD Manifesto. Op. Cit. page 5
IoD Manifesto. Op. Cit. page 6