There were no big condemnations, no one cried foul; the release of the Financial Reporting Council’s revised corporate governance code passed this week relatively smoothly. There will be those who find it problematic, but the public reception, at least, provided a mix of welcomes with suggestions that it could have gone further in some areas.
That there were no stormy declarations of a code gone wrong is probably down to the fact that this is a consultation document, so there is still much to play for. Plus there was clear evidence that the code has taken on some big themes: corporate culture, the fact that companies should be working for the long-term, and the idea that companies are no longer there for the interests of shareholders only.
Bodies as diverse as the TUC, the High Pay Centre and the CBI all found things to praise, if only faintly, while at the same time pointing to areas they suggest the code should have addressed.
But let’s not forget the background to the revision, and the heavy lifting it was intended to do.
As Theresa May entered the race to succeed David Cameron as prime minister, she placed corporate governance at the heart of her beliefs about social equality. In July she gave a speech linking governance to the people in society who felt that the current system—the capitalist economy—was not providing what they needed.
In fact, she placed governance reform at the front line of helping to fight what she identified as social “injustices”.
May said that non-executives were failing in their scrutiny role, and she would introduce employees and consumers to company boards; shareholder votes on executive pay would be binding; and more disclosure would be mandated of bonus targets and pay ratios.
She said: “…I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders.
“In practice, they are drawn from the same, narrow social and professional circles as the executive team and—as we have seen time and again—the scrutiny they provide is just not good enough.”
Think about that for a moment. The quote appeals to the idea that companies should be working for the “long term” but probably aren’t, or weren’t, and that the current cadre of non-executive directors is not diverse enough. Its context—a discussion of social injustice—implies that business has a societal purpose, not a narrow shareholder primacy brief.
The speech gave corporate governance the burden of confronting a big political agenda that is much broader than the previous narrow conception of governance as a check on boardroom behaviour.
The problem with short-termism
Of course, good governance should always have produced societal benefits. Trouble is, it didn’t seem to. Short-termism (brought on by problematic executive incentive schemes), fund managers in need of quick results, and a dodgy view of whose interests were being served by company management, didn’t exactly leave the reputation of big business blemish-free.
So, the code’s revision was aimed at helping stymie all of that, and helping bring more prosperity to the public at large.
It suggests that boards should now bring their focus to bear on “the basis on which the company generates and preserves value over the long term” (“preserves” here being the word relating to sustainability). Boards should now gather the views of the workforce (though on exactly which topic the code fails to mention) and disclose how they engage with the workforce. Boards should ensure company culture is aligned with values and purpose, and take action if it’s not working. And they should report on how they have engaged with “other stakeholders” as set out in Section 172 of the Companies Act.
There is a little bit about the independence of chairmen, which is overdue for clarification, and something on broadening the responsibility of remuneration committees to examine company-wide pay, not just boards. The new code also goes a long way to indicate that executive incentive schemes can be halted in their tracks if performance is not what was expected.
The code’s true mission
But the main thrust of the code is not simply to say: companies, clean up your act. Many will focus on the executive measures. But this code’s mission is something else. It now has a social agenda in a way it never had before. It attempts to integrate business into society, so that corporates no longer stand off to the side assuming they are ruled by a separate set of values which say: profit and shareholder primacy trump everything else.
And if the code is to have any hope of playing a role in achieving social justice, it will be in the core areas of corporate culture, consulting with employees and wider stakeholders, and genuinely running companies for the long term.
And that could be important. Context can sometimes be everything and the code’s revision comes at a time when central government is wholly distracted by Brexit negotiations and struggling to find bandwidth for other policy areas. In those circumstances the code’s revision and tilt at social injustice takes on a whole new significance.
Whether it lives up to that promise is another matter. There is still the consultation to negotiate and some of its measures could be watered down. Even so, it remains a draft code that forms a significant turning point.
And if it is judged in the future, it should be on its contribution to the “injustices” Theresa May highlighted. If it hasn’t contributed there, it will have failed.