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On the road to corporate enlightenment

01 October 2018 by Bernadette Barber

On the road to corporate enlightenment

Despite progress, the mission to improve corporate behaviour still has a long way to go

Wind the clock back to UK government’s Company Law Review of 2002 and those of us with long memories will recall it generated a whole debate about ‘enlightened shareholder value’; that is, the concept that corporate success should be pursued with an eye on the interests of a range of stakeholders, not just investors.

It was this debate that led to the statutory codification of directors’ common law duties to the company. That codification, insofar as it introduced the enlightened shareholder value concept, was set out in section 172 of the Companies Act 2006, highlighting that directors should be looking beyond a purely financial assessment in their decision making, albeit without disrupting the principle that a director’s primary duty is to their company’s members.

Despite the introduction of this requirement, however, public pressure to improve corporate behaviour has not abated. If anything, popular opinion is, more than ever, demanding that greater fairness be introduced into the world of commercial enterprise.

Measures are coming into play for both listed companies and their large unlisted cousins; designed to ensure that good corporate governance standards are expected of all such businesses.

One of the key areas of contention relates to those cases where companies have become insolvent – to the detriment of employees, pensioners and suppliers – after much value has already been extracted by way of dividend payments.

“There is unlikely to ever be a single solution to improving corporate behaviour”

It seems illogical that a legitimate dividend can be paid by reference to historical accounts if current finances indicate that such payments could jeopardise the business.

Regardless of the distributable reserves that may technically be available to a company, the directors should not be paying or recommending a dividend, if to do so is unlikely to promote the long-term success of the business. It is a classic example of how looking at one part of statute in isolation – in this case, the provisions around dividend payments – can lead to a breach of other requirements, such as a directors’ duties.

BHS would be a case in point and must certainly have been in mind when the government recently announced proposals that would introduce greater transparency and a less formulaic and backwards-looking approach to dividend payment decisions.

There is unlikely to ever be a single solution to improving corporate behaviour – board composition, information flows, director awareness and training, independent advice and external disclosures, for example, will all likely play a part.

No two boards will have identical needs or issues to address so each will need to use their own evaluation processes to understand those needs and issues, not just once but on a regular basis.

So it is to be welcomed that ICSA: The Governance Institute has been asked to look at establishing guidance on external board evaluation, a relatively unregulated area to now.

It would be beneficial, if that evaluation were to consider not only ‘internal factors’, such as the skills of the board and how they interact with each other, but also ‘external factors’ such as the quality of the advice and support directors receive.

If, as a profession, we believe the company secretary plays a key role in the effectiveness of a board, we should be keen to ensure that the board evaluation includes proper scrutiny of the company secretary’s own contribution to the board.

“No two boards will have identical needs or issues to address so each will need to use their own evaluation processes”

Alongside measures that encourage more effective approaches by well-intentioned boards, further thought should also be given to better deterrents to the genuine rogues.

Current enforcement rates are low and, although the number of individuals disqualified in the UK from acting as a director has been steadily increasing – up 23% over the last five years – in absolute terms the numbers are still pretty tiny. In the year to March 2018, fewer than 1,500 individuals lost their right to act as directors in the UK. To put this figure into context, there are currently 5.7 million private sector businesses in the UK.

Crucially there needs to be some way of cascading better practices to smaller businesses. Smaller organisations are generally under the radar when it comes to their boardroom behaviours, an issue that the extension to large private companies of the requirement to follow a corporate governance code will do nothing to address.

Although the introduction of unnecessary red tape is always to be avoided, when one considers that more than 99% of those 5.7 million UK business are small or medium-sized enterprises, the need to enhance standards across the spectrum is brought into sharp focus.

Bernadette Barber FCIS is director of company secretarial consultancy Chadwick Corporate Consulting

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