The UK will this week become home to a new centre studying corporate governance, aimed in part at resolving issues thrown up by the Covid-19 pandemic.
Established by the Institute of Directors, though structured as an independent body, the IoD Centre for Corporate Governance will prioritise an examination of the impact of artificial intelligence, stakeholder governance and sustainability on governance.
Advisory board members include Amra Balic, head of EMEA stewardship at BlackRock, governance expert and proponent of purposeful business Professor Colin Mayer, and frequent Board Agenda contributor Professor Andrew Kakabadse.
The centre’s creation comes at a time when there is much debate surrounding the future of corporate governance. While any current discussion of governance also involves examination of sustainability, recent debate has centred on the need for corporates to become “purposeful” companies—especially in the wake of Covid-19, which has shone an intense spotlight on the relationship between corporates, government and society.
According to Carum Basra, corporate governance policy adviser at the IoD, the pandemic has had a significant impact.
“The pandemic has presented immediate governance challenges such as how to hold an AGM with social distancing measures in place but also longer term challenges around the recovery,” he said.
“Looking further ahead, in light of the pandemic we may have to reconsider the relationship between businesses and the State, how debt is managed and the insolvency regime.”
Corporate governance reform formed significant parts of the manifesto pledges made by the Liberal Democrats and Labour parties during the December 2019 election. Both focused measures on “purpose” and involving employees in boardroom discussion.
The IoD published its own manifesto for corporate governance reform with a focus on introducing greater accountability and competence for company directors, and building sustainability into heart of business management.
The document called for a new code of conduct for directors, a new independent governance commission, minimum training requirement for directors and a more consistent approach to climate-related corporate disclosures.
Earlier this year at its annual Davos shindig, the World Economic Forum made its theme “stakeholder capitalism”, defined by Peter Brabeck-Letmathe, chairman emeritus at Nestlé, as a need for business to “create value for the many people, resources and communities it impacts”, not just shareholders, adding value for “employees, our community, and to another important stakeholder… planet Earth”.
That raises the question of how stakeholder governance might work. Not everyone sees it as feasible, despite its current popularity. According to Addisu Lashitew, fellow at the Brookings Institution, stakeholder capitalism requires a “fundamental rethinking of corporate governance systems and legal frameworks” because “regulators and lawmakers will have to work out the legal mechanisms that hold managers accountable to this renewed corporate mission”.
For many that is a tall order and in some quarters there is outright opposition to the idea of “stakeholderism”. Lucian Bebchuk and Roberto Tallarita, of Harvard Law School, argue the hopes of stakeholder capitalism are “illusory” and will insulate executives from shareholders, increase costs and delay reform when it is needed.
UK businesses have good reason to be concerned with stakeholders and their interests. The 2018 review of the corporate governance code not only told companies they should “establish purpose, value and strategy”, but also asked they build “effective engagement” with shareholders and stakeholders. Recent changes mean UK board directors also have to report against their responsibilities in section 172 of the Companies Act, which spells out duties in relation to stakeholders.
In recent years government interest in corporate governance has extended mostly to reforming audit, audit regulation, audit committees and the audit process following a number of high-profile scandals. A modest move was made to introduce employee involvement on boards, first begun under previous prime minister Theresa May, though this has been mostly through the appointment of non-executives in charge of gathering employee views rather throwing boardroom doors open to workers.
The overwhelming importance of sustainability and climate change underlines a continuing need for governance to evolve. Carum Basra hopes the new centre will contribute to any future review of the UK code. It’s likely that the current version will not be in place for long before there is pressure for further change.