Corporate governance reforms are underwhelming, and may have unintended consequences

Government plans for corporate governance reform, published yesterday, represented an opportunity to address a pressing problem. Last year the Prime Minister warned of a day of reckoning for Britain’s boardrooms, suggesting radical reforms in binding votes on pay and putting workers on company boards.

In the light of this, yesterday’s announcement is underwhelming. The two headline policies have gone. Instead we have proposals that are subtle tweaks to the status quo, that may have unintended consequences.

On pay, a register of companies where more than 20% of investors have voted against pay policy is one example. This information is already available to anyone with access to Google, so it is unclear what the new register will add. By creating a 'naughty list' of companies, activist shareholders need mobilise only 1/5 of shareholders in order to cause a company real reputational damage, and encourage investors to go elsewhere. Moreover, the figure of 80% represents a new threshold – in company law the highest threshold set is 75%.

The issues with pay ratios have been chewed over for long enough. Again, the information needed to compare the pay of the CEO with the pay of the average worker is already available. Ratios may produce some misleading comparisons – the famous 'Goldman Sachs vs John Lewis' challenge – and there is a risk this will create incentives for companies to avoid having low paid workers on their payroll. However, ratios are a good, if crude, step forward in generating debate about high pay.

Representing employees’ views at board level is long-overdue. Obviously, views differ on how this should work. At last year’s CBI conference the Prime Minister was quick to reassure business leaders. The TUC, unsurprisingly, has expressed disappointment that workers will not be electing representatives. The government has suggested three ways to engage with employees. Whatever companies choose to do, they will have to show they are taking this seriously, and recognising that employees have a vital contribution to make.

However, there is one genuinely radical idea, the extension of a corporate governance code to private companies. This represents a step-change in the relationship between private companies and society. For private companies of a certain size, how they organise and run themselves is now a matter of public scrutiny.

These large companies have real and significant effects on society, and how they are run, or behave, is a matter of public interest. But we should be mindful of the potential outcomes. Already we have seen a rise in companies choosing to remain private in order to avoid the requirements of public listing. Has the government considered all the effects of extending some of those requirements to UK private companies?

Ultimately, tinkering with rules and regulations is not what will rebuild public trust. The worst possible outcome for these reforms is a sigh of relief followed by a return to business as usual.

We want businesses and boards to take the lead in recognising they have direct responsibility for how they are perceived. It is for them to ensure they behave in a way that means the public feels they can be trusted. This is why ICAEW has launched Connect and Reflect. We want to hear about your experiences and opinions on how business can start to rebuild trust.

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