Friday 27 January 2017 5:00 am

Corporate governance: Board reformers must not rest on their laurels

Six months ago, corporate governance suddenly shot to the top of the political agenda when Theresa May formally launched her Conservative Party leadership campaign.

She said that the scrutiny non-executive directors provide “is just not good enough”, adding “we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well”.

She further observed that executive pay had trebled over the previous 18 years and that “there is an irrational, unhealthy and growing gap between what leading companies pay their workers and what they pay their bosses”.

Fast forward to the end of 2016 and the publication of the government‘s green paper on corporate governance reform addressing three key areas: executive pay; strengthening the employee, customer and wider stakeholder voice; and, in response to the BHS failure, corporate governance in large privately-held businesses.

Almost 20 options have been set out ranging from incremental change, for example toughening up the current annual advisory vote on the remuneration report and strengthening reporting on stakeholder engagement, to potentially far-reaching reforms such as establishing senior ‘shareholder’ committees to deal with executive remuneration and appointing individual stakeholder representatives to boards.

This year marks 25 years since the original publication of the Cadbury Report and the UK’s first corporate governance code, which is well-regarded internationally. Despite that, a thorough look at the system as a whole is now essential and should not just include but go beyond the issues identified in the green paper.

A partial review would both be a missed opportunity and run the risk of being a sticking plaster solution with the potential for unintended consequences.

To secure broad buy-in across the business and investment communities the review should be undertaken by a Corporate Governance Commission comprising board members, representatives of the key stakeholders – customers, employees and investors – and of civil society. It would be expected to report back within say a year and with a remit to recommend changes to the corporate governance and stewardship codes and to how the codes are brought in.

The overall focus of the commission’s work should be on how boards can best create long-term sustainable success in a way which benefits their stakeholders and wider society.

This will require companies to have an inspiring purpose and clearly articulated values which are deeply embedded in the business.

Boards must also place strong emphasis on innovation and productivity if wages and salaries are to rise satisfactorily – areas in which the UK economy has not performed well.

Getting the best people on boards is key to their performance and scope remains to improve board diversity especially at executive director level.

While many boards could strengthen their engagement with employees and customers, we should be cautious about having directors representing just them: collective responsibility is a central part of our governance approach and has served us well.

Ideas such as a board committee focused on stakeholder engagement and their fair treatment and stakeholder panels do, however, merit consideration.

On executive pay we should take a long hard look at how the current system is working; the areas causing concern such as the ratchet effect of quartile benchmarking; effective measures of long-term performance and the approach adopted in other jurisdictions.

The aim would be to arrive at a settlement that boards and the key stakeholder groups collectively feel is fair rather than leaving the issue to be addressed very much on a board-by-board basis.

Much has happened in the business world since we last took a broad look at the way we run our leading businesses. We should now develop an integrated approach to corporate governance that takes us towards the second half of the twenty-first century.