25 years since Cadbury: the future of corporate governance in the UK

“With the publication of the Cadbury Report in 1992 and subsequent creation of the UK’s Corporate Governance Code, the quality of corporate governance has been greatly enhanced and is now rightly globally renowned.”

In his speech today, Sir Win Bischoff, Chair of the Financial Reporting Council (FRC), reflects on how, over the last 25 years, the UK Corporate Governance Code has contributed to corporate confidence.

The FRC has undertaken a comprehensive review of potential tightening of governance practice. We followed their report on ‘Corporate Culture and the role of Boards’ with our own research, seminar and report exploring the implications (just let us know if you’d like a copy).

“A key reason why global investors commit their capital to UK listed companies is the trust and confidence the Code engenders, thereby benefiting UK society in the long-term through jobs, growth and prosperity.”

Sir Win stresses:

“As we look to the next 25 years, it is important that our framework of corporate governance continues to evolve. The demands are growing.

Inevitably Brexit is also an issue. An overriding expectation is that investors will continue to look to the UK as a destination of choice… A proportionate, principles-based framework for corporate governance will help to achieve these outcomes.”

Questions of governance and accountability of Boards ring loud for UK business – in the week that the BHS pensions scandal has had at least some resolution, with Sir Philip Green’s settlement of £363m.

The challenge is how to hold Boards more accountable for culture, and ensure greater fairness in the running of business and sharing of reward, as part of enabling high performance.  There are all kinds of consultations currently looking at this very issue.

The Prime Minister has shown keen interest in employee representation on the Board. The TUC has outlined a practical way to make this happen with its report ‘All Aboard’. The UK Government published its Corporate Governance Reform Green Paper last November with the response to consultation phase now under review.

The next phase is to agree the improvements necessary to tighten governance and accountability. They will need to do so to ensure good practice and fairness, however it remains to be seen how deep and broad the changes might be.

Sir Win calls for more FRC powers to hold all directors to account for corporate failures and to apply greater scrutiny on how they have discharged their responsibilities under Section 172 of the Companies Act.

He points out that the FRC’s current remit means it can “sanction accountants, but not directors – who may be just as culpable when companies fail but happen not to be members of the profession. The gaps need to be closed.”

He reinforces the “principles underlying corporate governance in the UK which we feel must be retained”

  1. The strength of the unitary board, strong shareholder rights and the “comply or explain” approach.
  2. Application of the law. The regulatory framework is fragmented and enforcement is not fully effective at present.
  3. Good performance is encouraged and rewarded appropriately… Boards must exercise judgement and use the discretion they have, and take greater responsibility for employee matters across the organisation. They should more clearly explain what they have done and why.

Will new requirements even extend to reporting on culture in the corporate report? In our research we found around 40 companies in the FTSE 250 who currently mention culture, but very few who goes beyond a list of ‘our values’ or an overview of employee engagement scores. Only a few, some of the obvious pioneers like M&S, have invested time in qualitative assessment or have their Directors make a firm commitment to issues of culture and ethos.

We’re likely to hear next steps from the FRC in early summer, and the Government later in the year. Whatever the outcome, the seriousness of the issue can not be overlooked. As Sir Win Bischoff concludes:

“Corporate governance must be such as to maintain … high levels of trust and confidence among investors. At a time when geopolitics and world economics look less certain, that will be ever more important.”

Email us to request a copy of our report ‘Delivering capital from culture’

Or to book a place at our next seminar on leadership, culture and belonging in June 2017.