Corporate governance: the Brexit effect

Prime Minister Theresa May sounded the official starting gun on Brexit on the same day that the EU Commission scuppered plans for the merger of the London Stock Exchange and Deutsche Boerse. As questions hang in the air about how close relations will be between continental Europe and the UK going forward, what better time to consider how Brexit might affect corporate governance.

At first glance it would seem that the impact of Brexit is likely to be low. The UK is way ahead of the field in most areas of corporate governance, and the UK Corporate Governance Code has helped to shape governance around the globe. The fact that the UK has long been at the forefront of international good practice should stand us in good stead, but we cannot afford to be complacent.

EU regulation

EU and UK company law and corporate governance arrangements have been intertwined for decades and this influence is not likely to disappear overnight. Thus far EU regulation has tended to mirror UK regulation – think the Shareholders Rights Directive that incorporated the UK’s Comply or Explain principle –, but this will not necessarily remain the case for ever and we will need to ensure that the UK’s edge as a leader is maintained.

The focus on disclosure requirements and company law harmonisation is likely to continue and companies should take the necessary steps in relation to this as and when appropriate.

Just as ‘The European economy depends on well-functioning financial markets’ as Margrethe Vestager stressed in relation to the LSE/Deutsche Boerse proposed merger, the economy benefits from well governed businesses that adhere to good practice. As ICSA has continually stressed, successful economies have trusted, sustainable businesses at their core and protecting the governance frameworks that support this will remain a key responsibility.

The bigger picture

The UK has long enjoyed a reputation as a safe place to do business. This is why Qatar announced plans to invest £5 billion in transport, property and digital technology earlier this week. Reputations are hard to build and easy to lose, however, and it is imperative that the UK maintains its international reputation as an efficient and trusted place to do business if we are to see continued investment.

As the UK turns to other trading partners and seeks to implement cross-border trade agreements to ensure that it remains competitive, alignment with international norms is likely to increase.

Doing the right thing

The current UK Government is showing a greater interest in shaping corporate governance around social justice/injustice, although ‘justice’ and ‘injustice’ are of course heavily loaded words. We have taken part in the Government and the Department for Business, Energy and Industrial Strategy’s reviews of corporate governance and some of our views on this are clearly laid out here.

Above and beyond the question of social justice, doing the right thing should remain the backbone of UK corporate governance. The basic tenets of transparency, accountability, integrity and stewardship have helped the UK to create one of the world’s foremost corporate governance frameworks and this is something worth hanging on to and improving. We need to ensure that UK company law, corporate governance and listing rules remain fit for purpose. As the primary regulator with responsibility for corporate governance and corporate reporting, the Financial Reporting Council will play a key role.

Looking forward

While corporate governance in the UK is world class, and the effect of Brexit should not be too destabilising, it will need to evolve in order to retain its leading position. New challenges and demands are likely to be placed upon it, so it is likely to be a case of ‘Watch this space’.

Top tips for UK companies

  • Prepare, prepare, prepare! Boards must ensure that all business risks have been identified and tested, not just once, but regularly as Brexit unfolds
  • Ensure that your strategic report is fair, balanced and easily comprehensible. Give as much thought to financial risks such as currency rates as you do to operational risks
  • Think about your company’s culture, values and behaviour, and the impact that your business practices have on all stakeholders, including society as a whole 
  • Make sure that you are on top of current EU legislative changes that are likely to impact you, such as the EU General Data Protection Regime that comes into force in 2018. We’re shutting the door, but we haven’t gone yet!
Peter Swabey, is Policy and Research Director at ICSA: The Governance Institute

Search ICSA