ICAS responds to Green Paper on corporate governance in the UK
From executive pay to directors’ responsibilities, James Barbour summarises the Institute’s views on the Government’s consultation
ICAS has responded to the UK Government’s green paper on corporate governance and expressed its support for a level playing field for all significant corporate entities, regardless of whether they are publicly listed or privately held.
The ICAS Business Policy Panel also highlighted, however, that any such strengthening of the corporate governance framework would need to be proportionate and appropriately targeted.
The focus, therefore, should be on large private businesses (based primarily on number of employees) as a matter of public interest, given their potential impact on society.
A three-criteria approach, as set out in the Companies Act 2006, would be easy to adopt, but a significantly higher threshold for the number of employees would be more appropriate (250 employees is too low).
Options for changes
The green paper, published in November last year, set out options for changes to the UK’s corporate governance regime, including measures aimed at enabling shareholders and their representatives to hold companies to account more effectively on issues of executive pay and performance.
The UK Corporate Governance Code (the Code) applies to listed public companies. ICAS supports a similar but more proportionate Code, targeted at applicable unlisted businesses. Further consideration will be needed in terms of how to apply this, as currently the requirement to comply with the Code, or explain where there is non-compliance, is driven by the Listing Rules.
ICAS has also re-emphasised its support for the “comply or explain” principle and for minimal statutory intervention, unless there is evidence that no other option is feasible. Establishing the right culture and behaviours within all corporates is fundamental.
This broader perspective, and the question of ethical behaviour, needs greater profile at board level across both listed and private companies. We therefore welcome the ongoing work of the Financial Reporting Council on corporate culture. ICAS is also proactively pursuing the ethical agenda through The Power of One initiative.
The need for a holistic approach
ICAS has expressed its support for a more balanced and holistic approach to decision making by directors. To help embed good practice more effectively, guidance should be provided which encourages directors to report how they have considered and discharged their broader duties under the Companies Act 2016.
While executive remuneration worthy of monitoring and challenge, there are other issues that also require sound judgement and can have a significant impact on business sustainability. It is not necessarily in a business’s best interests to encourage greater focus on one.
In terms of pay ratio reporting, ICAS is not convinced that a statutory requirement to disclose a pay ratio is the answer. The ICAS preference would be for the UK Corporate Governance Code to include further guidance on how the company is considering/addressing public expectations and avoiding the award of excessive executive pay.
Directors responsibility of duty
Ultimately, it is the directors who are responsible for ensuring how well they discharge their duties. While it is important to identify and remove any barriers or obstacles to assist them with accountability and scrutiny duties, a preventative approach is better than a complex system of multiple checks and balances.
Ultimately, creating a strong and balanced functioning board and ensuring that an appropriate succession plan is in place are vital. There is no easy or single solution to this.
Read the full version of this article in the April 2017 edition of CA magazine