Question time
An interesting week in politics brings some nuggets of corporate governance to mull. The first is the new government’s drive to reduce regulation on business. That was in some way realised by changing the definition of “small” company to one with 500 employees or fewer. That’s a boon for those firms, with the government estimating that it should remove 40,000 businesses from some reporting obligations.
However, it seems unclear at this stage which obligations will go. Nigel Sleigh-Johnson, a director at ICAEW, one of the UK’s many professional accountancy bodies, says: “With this in mind, we have a number of questions and concerns about the announcement.” Sleigh-Johnson wants clarity on what the reporting and audit obligations will be. That makes sense.
Lots of interested parties (investors, banks, stakeholders) rely on audited accounts to make their decisions. It’s not good to keep them in the dark.
Scrappy information
On the subject of reducing regulation, there was uproar on social media during the Tory party conference when it was reported that business secretary Jacob Rees-Mogg wanted to scrap all business regulations for SMEs. What would happen to employment law obligations, health and safety, and consumer protections, many wondered. That seems a lot to untangle.
There was no further clarity so we can park that for now and assume the incineration of all SME business regulations was a kite being flown for who-knows-what purpose.
Gender agenda
One sort-of-reliable rumour was that doing away with gender pay gap reporting had been positioned in front of the regulatory bulldozer. But the Financial Times reports that the prime minister had vetoed the idea. Pay gap reporting, according to reports, was bundled up with other ideas that were also canned: doing away with the 48-hour week and the introduction of “no-fault” dismissals for highly paid workers (this on the basis that well-paid people find it easy to get new work).
We can only speculate that Liz Truss reasoned she already had enough to deal with, like saving her premiership.
Going for woke (again)
So, the US row over ESG continues (no, don’t roll your eyes—it’s important). The latest headlines from over there seem focused on one Vivek Ramaswamy, who has been making waves with his arguments that ESG shouldn’t be any part of corporate decision making. In late September, he made headlines after writing to the chief executives of Apple and Disney, asking them to stop making “political statements” on behalf of their companies.
Ramaswamy is the author of a book, Woke Inc, and runs an investment fund, Strive Asset Management, which both aim to persuade companies that they should not be thinking about liberal politics before their bottom lines.
Ramaswamy has attained such a profile that The Times reported this week on his ascent, quoting the activist saying ESG is “sucking the lifeblood out of a democracy”, which seems rather like… a political statement. Ho hum.
No special treatment
Elsewhere, others have felt compelled to clarify their viewpoints on ESG as it slowly turns into a tangle. London Business School prof Alex Edmans, a well-known writer on ESG and business, put out a note clarifying that ESG is important but should be considered in the same way as any other long-term value factor.
Investors, Edmans says, are rightly held to account on “greenwashing” but so should others be who fall short, such as index funds that underperform. Nor should practitioners insist on action related to ESG that they wouldn’t demand for other drivers of value, like “tie executive pay to them”.
“Many of the controversies surrounding ESG,” writes Edmans, “become moot where we view it as a set of long-term value factors. It’s no surprise ESG ratings aren’t perfectly aligned, because it’s legitimate to have different views on the quality of a company’s intangibles.”
Edmans has this sage advice: “We don’t need to get into any fights between ESG believers and deniers, nor politicise the issues, because reasonable people can disagree on how relevant a characteristic is for a company’s long-term success.”
The wheels of industry
Some news from China. Professors from Hong Kong and China have looked at what happens when institutional investors make site visits to their investee companies to kick the tyres (disclosure of site visits is mandatory for members of the Shenzhen Stock Exchange). They find that more site visits correlates with lower audit fees.
How could this work? The academics write that more kicking of tyres brings about more information transparency from companies and hence better corporate governance, both “potential channels” for reducing audit fees.
So there you are, investors: get on the road.