Almost a year ago I was sitting in a conference listening to a debate about the European Union’s work on a capital markets union.
Discussion focused on enabling cash to be moved more easily across borders to support investment in smaller companies. The target date, then, for implementation was 2019. But the referendum vote means you can forget Britain being part of that story. Probably.
Similarly, just days before the big vote, states across the European Union brought into force the EU’s Audit Directive introducing new rules governing the appointment and work of auditors. What of that now? Will it survive our withdrawal from the EU? Will it be a target of those who would roll back the EU’s influence?
These and many other questions come to mind when the implications of a Brexit for corporate governance are considered.
What of EU laws and regulation?
As others have noted elsewhere, the UK Companies Act 2006 is one of the main pieces of legislation affecting the corporate world in Britain, but a number of its provisions come from EU law including the Company Law Directive, the Shareholder Rights Directive and the Accounting Directive. What of these laws and regulation?
Recently, in an update to the Accounting Directive, the EU had also been working on tax transparency with recent proposals for country-by-country reporting aimed at improving the accountability and transparency of multinationals for their tax affairs. But it becomes another piece of legislation over which questions will surely hang.
Manifest, the proxy voting advisers, has already noted that the future of amendments to the Shareholder Rights Directive look uncertain.
The directive, argued about across the continent, contains key provisions with the aim of improving the engagement of shareholders, encourage long-term investments and improve cross-border voting rights. Many of the proposals have been controversial, not least those affecting director remuneration and additional voting rights for long-term shareholders.
But the amendments have stalled on their way through the EU and the referendum result throws doubt on whether any of it will come into force in the UK. More questions.
And it’s worth reminding ourselves that the EU has involved itself in many others areas of governance and provided recommendations including, perhaps, the most important principle in governance today (though it was already present in the UK)—the “comply or explain” requirement.
Just as the UK economy has been thrown into an era of uncertainty, so too has the future of governance.
The EU had become a significant driver of governance regulation in many areas. Undoubtedly, the capital markets union would have had an influence on governance for small companies, just as new audit rules are in the process of transforming the relationship between companies and their auditors. The role of shareholders was on the threshold of significant change. But the EU’s role in the UK now comes to a grinding halt as we enter a regulatory pause.
Many in the UK will perhaps see the country’s withdrawal from the EU as a good thing for the future of governance. But the EU nations, with their stakeholder model of governance, provided a useful counterpoint to the UK’s shareholder model.
This is not to be underestimated. Withdrawal from the EU could prompt many to launch lobbying campaigns in a bid to repeal the elements of European legislation that offend them most. Indeed, from a business point of view, we might see a wave of campaigning as every business sector looks to clear the decks of EU rules they dislike.
And that calls for a moment of reflection and no small amount of caution. No one should be repealing and throwing out regulation simply because it originated in Brussels. The EU had its faults but much of its rule-making could be considered valuable. To simply jettison everything it produced would be reckless. Not least for outside investors seeking an environment of reliable governance..
That said, those who believe the time has come to strip the UK of all its EU legislation would be naive. Negotiations on our extraction from Europe are yet to begin and it may be that much EU legislation will have to remain in place as a result of whatever settlement we reach. EU leaders have already made clear that the free movement of people is non-negotiable, but access to European markets may depend, in the end, on much else.
If the settlement does include the continued existence of current EU regs in the UK, it means business as usual. If not, an effort to challenge many aspects of EU law is likely, and non-executives directors will be forced to keep up with change as it happens. That’s potentially a heavy workload down the road.
For the time being, strategic decisions will be front and centre for companies that trade across borders. As negotiations begin on the separation, international companies will be front and centre. Investment and expansion decisions that may have been on board agendas will probably have to wait until a clearer picture emerges.
Non-executives will have to consider all strategic decisions in terms of what may or may not happen with Britain’s exit negotiations. This morning Richard Branson told a breakfast TV programme that he had already called off one deal, thereby ending prospects for 3,000 jobs.
Non-executives will have to be acutely aware of the terms of Britain’s deal to ensure they have a full understanding of the changing regulatory landscape. At the moment, the shockwaves are still to be felt. We are far from knowing what the future landscape for business will be.