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1 October, 2023

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Governance centre aims to rebuild ‘professional legitimacy’ of directors

by Gavin Hinks on July 1, 2020

The future of AGMs, corporate purpose and stakeholder primacy were some of the topics covered at the inaugural event by the Centre for Corporate Governance.

A light, airy boardroom with directors

Image: Shutterstock.com

While the Covid-19 pandemic may not have been caused by a corporate governance failing, it has certainly shone a light on areas that need reform.

This week the UK’s Institute of Directors launched a new Centre for Corporate Governance with a discussion event aimed at weeding out some of the big issues in the current age and illuminated by the pandemic.

Here’s a checklist: the annual general meeting is “not fit for purpose”; governance must adapt urgently to stakeholder capitalism; businesses need to define their corporate purpose; corporates must come to terms with the quid pro quo required of having received billions of pounds in state financial support during the lockdown; directors need to be more accountable and more professional; public trust in business still needs to be re-established 12 years on from the financial crisis of 2008.

According to IoD chair Charlotte Valeur the pandemic has created a “real challenge” for board directors, but the situation is open to remedy.

“Boards have an opportunity to build professional legitimacy in terms of their role in society,” she said.

Effort at the new body has been under way for some time, with working groups focused on the relationship between governance and artificial intelligence, stakeholder capitalism and sustainability.

The launch event served to focus minds on the transformation under way in business as a result of issues such climate change and, of course, the pandemic.

The political context was set by Darren Jones, an MP and chair of BEIS, the influential House of Commons business committee, who highlighted the role corporate governance reform will play in rebuilding an “inclusive” and balanced economy that also confronts the climate crisis. That will require the help of business and, he says,  a governance landscape that enables business to recognise “environmental and societal” costs.

“A corporate governance architecture which begins by broadening the scope of [the] stakeholders companies are answerable [to], or engaged with, seeking to build an environment of genuine trust and creating channels of accountability, should be the first and paramount step in that process,” said Jones.

He added: “Under any circumstances, but particularly at moments of transformation, a plan to grow the economy demands an understanding of how governance structures shape the economy; distributive outcomes depend on more than state spending, and regulatory fixes in Parliament.”

Companies can choose to change some things for themselves, it was noted. Guy Jubb, author, accountant, former head of stewardship at Standard Life Investments and now a professor at the University of Edinburgh Business School, called time on annual general meetings, insisting they were “not fit for purpose”. He also called for audit reform and highlighted how stakeholder communications could be transformed. He said the switch to online communications during the lockdown had demonstrated that chief executives could speak directly to employees but also potentially to suppliers and customers.

Online video conferencing applications, he said, had “levelled the playing field” in the way CEOs communicate, making them “unambiguous” and involving employees and others directly. It also side steps the risk of “cascading information” that sees management messaging become “corrupted”.

Covid-19 and corporate purpose

Kit Bingham, head of the chair and non-executive recruitment practice at headhunting firm Odgers Berndtson, said he believed governance would move towards a “stakeholder” model as “shareholder primacy” comes under increasing pressure.

He said this means companies should continue being accountable to shareholders, but on a greater range of non-financial measures. None of this is new, said Bingham, so why now?

“There was a lot of frustration with our current model anyway,” he said, “and I think Covid will have the effect of bringing that to boiling point. And I say that because I think Covid really underscored the question of corporate purpose. What are you here to do? What is this company delivering for society in a positive way? Crisis has a way of underscoring that.”

Choosing a stakeholder model will however, require the support of investors with their capital and their votes, he added.

Fortunately, the world’s largest fund manager, BlackRock, was on hand to weigh in. Sandy Boss, the investment manager’s global head of stewardship, insisted sound governance and sustainable business practices made for profitable companies. It also makes them resilient, even in a pandemic.

“Our research into the performance during the crisis has indicated the companies that had strong profiles on material sustainability issues actually were more able to weather these types of conditions,” she said. Companies need a “strong sense of purpose” and a commitment to stakeholders, she added.

Corporate governance reform

Those thoughts were echoed by Professor Colin Mayer, who has researched and written extensively on the subject of corporate purpose. He told the gathering that the review of the UK governance code in 2018 produced a document that enshrined the idea of purpose at the heart of corporate governance and “ensuring it is embedded” in everything they do.

Mayer stressed purpose is not a bolt-on tick-box element of governance. The 2018 code, he said, “emphasises the fact that corporate purpose is about a company’s strategy. It is not CSR, it is not something that is just peripheral to a business. It is absolutely core to what a business does.”

Codes did not necessarily meet with universal approval. Bob Garratt, a board consultant and visiting professor at Cass Business School, suggested the the UK could do away with its own code and start again from scratch using the now famous Section 172 of the 2006 Companies Act as a basis for enforcing corporate behaviour.

Section 172 is “not perfect”, said Garratt, “but it actually covers ESG issues, it covers employee issues, it covers supply line issues; it covers environmental issues and it covers social impact issues.”

Garratt’s broader point was that the 2006 act already sets out the duties of boards and the need for “purpose” in a company, and yet the law is barely ever enforced.

The business environment is changing. The IoD has recognised that governance will need to avoid being left behind. The new governance centre will hopefully go a long way to ensure that doesn’t happen.

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For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

coronavirus, corporate governance reform, Institute of Directors, IoD Centre for Corporate Governance, stakeholder capitalism, stakeholder communications, strategy

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