House of Commons inquiry into corporate governance

20 / 10 / 2016

The Business, Innovation and Skills Committee of the House of Commons has jumped on the bandwagon and launched an inquiry into corporate governance. An analysis of governance is drawing interest from a broad spectrum of people including our new Conservative Prime Minister, the Labour chair of the Business, Innovation and Skills Committee and the General Secretary of the Trades Union Congress: each is, with some urgency, seeking to find something to criticise or change and to champion the same.

Whist it is clear that the issue of executive remuneration represents a concern which remuneration committees and investors do not seem to have sufficiently addressed. It is also apparent that politicians are saying things which demonstrate little more than their lack of understanding. For example, the Business, Innovation and Skills Committee document raises a number of questions based upon two errors:

  • that executive and non–executive directors owe different duties: they do not, they owe exactly the same duties; and
  • that the general duty of directors as set out in section 172 of the Companies Act 2006 requires directors to focus on the long term: this is not correct.

Unitary board

Each director is an equal in the boardroom, owing the same duties to the company, whether executive or not.  The structure of the English unitary board remains a key element of our company law and corporate governance settlement and should not be tampered with, without proper consideration of the full consequences.

General duty of directors

The Companies Act 2006 codified the duties of directors into sections 171-177 and 182.  The core section is section 172 which states that “a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole…” and then continues to set out six factors which should specifically be considered, including “the likely consequences of any decision in the long term”.  However, that is radically different to an assertion that the duty of directors is to focus on the long term.

Clearly the time horizon of a business has an impact on the manner in which it should present its financial statements and it is therefore understandable that the concept of long-termism has been introduced by the Financial Reporting Council into the UK Corporate Governance Code (Main Principle A1).  The UK Corporate Governance Code is drafted to support the decision making of companies with a premium listing and, therefore, by extension, a level of permanence in corporate objective.

Conclusion

In the coming months it will be important to engage with policy makers on issues of governance.  However, those policy makers would do well to start their investigations by properly focussing on the significant body of work they have already created.

For further information please contact Edward Craft at ecraft@wedlakebell.com.