Some Deeper Thoughts on Reframing the UK’s Corporate Governance Oversight and Regulatory System

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This is a personal statement added to the submission led by Professor Paul Moxey and colleagues as their response to the request for comments on the proposed changes to the UK’s FRC Corporate Governance Code.

The many current negative news items concerning the ineffectiveness of the present UK Corporate Governance system display only too vividly its weaknesses and the contempt in which the majority of UK citizens hold it. Issues like Carillion and BHS, Oxfam and Save the Children, Grenfell Tower, Network Rail and the fast rising costs of the Financial Conduct Authority all highlight the flawed current assumptions on which ‘UK Corporate Governance’ is based:

  • That Corporate Governance really only applies to listed companies
  • That Corporate Governance is the professional province of the accountants
  • That the only effective regulatory and oversight tool is a Code of Conduct

These assumptions do not fulfil the nation’s current or future needs. A total rethink at national level is now needed; and the present well-intentioned attempts to modify the FRC Corporate Governance Code are destined to failure.

This paper is not a lone voice but reflects many others. After 5 years research for my new book Stop The Rot: Reframing Governance For Directors and Politicians, and the hundreds of interviews in boardrooms around the world, we are faced with a paradox. On the one hand ‘UK Corporate Governance’ (in the form of the versions of the FRC CG Code) is frequently quoted as ‘the best in the world’. Sir Adrian Cadbury’s 1992 report seems to have become the world default position for this. On the other hand increasingly disillusioned public stakeholders are saying that the current system is not fit for purpose as it fails to deal with some 95% of our organisations that are not listed companies. Confirmation of this can be found by looking at the statements from so many recent Parliamentary Select Committees and public enquiries where the standard phrase ‘but the real issue behind the problems was the lack of effective corporate governance in the organisation’ is seen so often. This may be comfortable current coinage but it does not resolve the issue. Such statements do not go any further to argue what should be done about this or, critically, which organisation should have national oversight for ensuring effective corporate governance.

Ironically, the need for a complete rethink was made to me just before his death in May 2015 by Sir Adrian Cadbury in a private letter (we had worked together on such issues since the mid-1980s). He was discouraged by the way UK and international corporate governance had declined into a box ticking and risk-avoiding culture. He insisted that we must return to the entrepreneurial, risk-taking corporate culture in which the board was sovereign. He argued that the key board duty was to ensure the future health of the business. He regretted that from the start the Cadbury Report had the title ‘On The Financial Aspects of Corporate Governance’ as he felt that this had constrained and positioned wrongly the importance of national corporate governance as a social and political force beyond mere accountancy. He encouraged me strongly to continue his task.

Reframing UK Corporate Governance At National Level

To progress out of the current weak and ineffective non-system I assert that at a minimum we must reframe our thinking and behaviours about effective corporate governance to encompass the following broad statements:

  • Corporate Governance is a social good across all registered national organisations – private, public and not-for-profit
  • Therefore, a national system of CG oversight and regulation must be created beyond the restrictions of Accountancy.
  • Future national CG must burst the restrictive boundaries of directors-only thinking to include the rights and duties of directors, but also the rights and duties of Owners, Regulators and Legislators under a system of Public Oversight.
  • The Basis of any future national CG Code must be founded on two simple action-based assessments for boards:
  1. that the board has continuous oversight and responsibility for resolving the classic board dilemma of ‘how do we drive our organisation forward whilst keeping it under prudent control?’
  2. that the nation ensures that the Seven General Duties of A Director in the Companies Act 2006 apply to all organisations registered in the UK – private, public and not-for-profit.

Particular reference will be made to assessing those Duties relating to ensuring the future success of the business, independence of thought, and the deployment of care, skill and diligence in board decisions.

The Future Role for the FRC in UK Corporate Governance

I make the following proposals:

  • That Corporate Governance is removed from the Accountancy-focused current FRC
    That a UK Corporate Governance Reporting Council (UKCGRC) be established immediately
  • That the new UKCGRC be given the right to debar directors in any registered organisation for unlawful activities and for conduct detrimental to the interests of their owners and stakeholders
  • That Parliamentary oversight be established to reframe laws and codes where necessary to allow the effective running of the UKCGRC
  • That Parliament creates a select Committee for Corporate Governance
  • That Parliament creates a Standing Commission on Corporate Governance thereby allowing continuous learning between Directors, Owners, Stakeholders, Regulators and Legislators to improve the effectiveness of UK Corporate Governance for the good of the nation.

 

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