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UK: The Need for Better Governance

It was in the wake of the BHS scandal in 2016 that UK Prime Minister Theresa May announced a major reform of UK corporate governance. But in 2017, one of the greatest scandals in British history, the Carillion collapse, occurred. The UK Financial Reporting Council published a revision to the Corporate Governance Code on Dec. 5, 2017, but there is now considerable debate over whether reform measures are sufficient.

TIMELINE FOR CORPORATE GOVERNANCE SCANDALS IN THE UK

1991 – Polly Peck collapses with £1.3 billion (US$1.85 billion) in debts

1991 – Robert Maxwell plunders £443 million (US$628 million) from Mirror Group pension fund

2003 – Sea-Land Services pension fund shows 50 per cent deficit

2005 – MG Rover announces insolvency, 30,000 jobs lost

2008 – Northern Rock collapses with £3 billion (US$4.25 billion) deficit

2008 – Royal Bank of Scotland collapses needing £12 billion (US$16.9 billion), is nationalised

2012 – Libor scandal shows rate-fixing at a number of major UK banks

2014 – Tesco overstates profit by £263 million (US$373 million)

2016 – BHS closes with £571 million (US$808 million) hole in pension fund

In the midst of the UK government’s efforts to reform corporate governance, the Jan. 14 collapse of outsourcing firm Carillion has again shone a spotlight on gaps in the country’s regime.

“The UK Government and Parliament launched two public consultations on corporate governance in 2016 and 2017 which included questions on the obligations of corporate directors and systems of executive remuneration, as well as on the role of workers to counter-balance short-term thinking. Beyond the present damage control and depuration of responsibilities, it is imperative that UK legislators proceed with the revision of the corporate governance framework in order to avoid yet another corporate implosion,” complains Filip Gregor, Head of Responsible Companies at Frank Bold, in a recent report.

Carillion’s unpaid debts come to about £750 million (US$1.06 million), and the UK taxpayer will wind up on the hook for a large part of that – or more than £250 million (US$355.97 million), according to some current estimates.

The scandal has exacerbated the ongoing debate about the future of corporate governance in the country.

“How is it that so many warning signs were ignored by the company and the government? What were the Carillion board and senior management doing to address the spiralling problems at the company? Why are the regulatory bodies stepping in only after Carillion’s collapse?” asks MP Rachel Reeves, who chairs the Business, Energy and Industrial Strategy Committee in the UK Parliament.

On Dec. 5, 2017, the UK Financial Reporting Council published a new version of the Corporate Governance Code, one that changes somewhat the overall orientation of the regulations. A consultation is underway, but the tenor of the debate is growing stronger.

“The revised Code emphasises the value of good corporate governance to the sustainable growth of a company and encourages policies and practices that generate value for shareholders and aim to benefit society. There is a new focus on stakeholders, integrity and corporate culture, diversity and how the overall governance of the company contributes to its long-term success,” explains David Crone of the London-based law firm Womble Bond Dickinson.

The new code is shorter, sharper and better-focused on the long term, most observers agree.

“But many feel that it does not have the bite required – it would not have saved Carillion, although poor corporate governance is clearly what led to Carillion’s failure,” comments Sophie Brookes of the London-based law firm Gateley. “The proposed new code will only prove effective if shareholders and investors are prepared to step in and hold boards to account.”

Tim Ward, chief executive of the Quoted Companies Alliance, also feels that there is insufficient transparency at most companies, just like at Carillion. He says, in a note: “At another level we are not seeing strong increases in the level of disclosures relating to Audit Committee and Remuneration Committee reports. For instance only a third of companies include details of significant issues considered by the Audit Committee in relation to financial statements and how these issues were addressed. So there is more to be done by companies.”

There is also some frustration, in the UK business community, that the government’s proposals were not implemented in the latest version of the code.

“So far as listed companies are concerned, the proposals do not go as far as some had thought they might. While publishing the ratio between CEO pay and their employees’ pay looks set to become mandatory for these companies, proposals to hold annual binding shareholder votes on executive pay and to require employee representation on boards are not being taken forward,” comments David Collins of the Denton’s law firm.
Ward proposes that dialogue with shareholders is the key to making corporate governance work in the UK.

“Once good corporate governance has been put into place, and the board are confident that they have done only what is needed to create long-term value, then the board should ensure that in the relevant section of their website there is an index showing where each disclosure required by the QCA Code can be found. Each box needs to be ticked to help shareholders find what they are looking for,” he continues. UK Prime Minister Theresa May reacted to the Carillion scandal with a call for strengthening corporate governance: “Too often we’ve seen top executives reaping big bonuses for recklessly putting short-term profit ahead of long-term success. Our best businesses know that is not a responsible way to run a business and those who do so will be forced to explain themselves,” she said.

But this rhetoric is not being put sufficiently into practice in the current proposed reform of corporate governance, many observers feel, and the debate over the reforms is likely to be serious.

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