A Frank Field-Version of Corporate Governance: The Need for an Ideological Shift

It was reported over the weekend that the Work and Pensions Committee have suggested that the U.K. Government could prevent another spectacular financial collapse, like that seen recently with British Home Stores (BHS), if they were to make private companies abide by the Financial Reporting Council’s (FRC) corporate governance code – currently reserved for publicly limited companies. More specifically, the Committee’s report calls for Limited Companies - which have to abide by much less regulation traditionally - and who have more than 5,000 pension scheme members, should be governed by the Code which sets standards on board membership, remuneration, and shareholder relations. In this short post, the focus will be on the calls made by the Committee, and ultimately on what may need to happen for such a seismic, and frankly historical shift to take place.

The report, which is focused upon corporate governance standards in the wake of the collapse of BHS and which inexplicably left 11,000 pension scheme members without their pensions whilst the bosses, and former bosses of the company purchased £100 million Yachts, is concerned with a number of extremely important elements for the future of corporate governance in the U.K. (and arguably further afield). Traditionally, Limited Companies, the ‘relatively’ smaller of the two main versions of an incorporated company (just going by the amount of capital required to register as a Public Limited Company [plc]), are subjected to much less regulation and rules regarding their composition. This, for the Committee, is just one of the many reasons for the collapse of BHS. Frank Field MP, who is the Chairman of the Committee, has been particularly vociferous in his rebuke of the former boss of BHS, Sir Philip Green, even going as far as to describe his actions as ‘evil’ during his stewardship of BHS, is concerned that the lack of oversight into the composition of a Ltd company means that pension scheme members are not being represented, nor considered, when it comes to the stewardship of a large Ltd company. In addition, the Ltd status of the company means that there is very little information made public, which may have alerted onlookers sooner to what was to be the biggest collapse of a retailer in the U.K. since Woolworths famously folded.

These claims and proposed resolutions are not unwarranted. As Frank Field himself stated ‘for a company with a big social and economic footprint like BHS it is simply not enough to be accountable to shareholders – particularly when one shareholder owns most of the stock’. As pension scheme contributors, whose investments were plundered by the bosses of the company, it is surely just that they be a) represented on the board, b) have their interests systematically considered, like that of shareholders, and c) be able to access more information, and quicker. But, these aspects fly in the face of modern capitalism, and herein lies the issue. Publically limited companies are considered to be socially important due to their size, reach and influence, but it is not the case that only companies with these attributes are publically limited and, therefore, bound by increased and considered regulation. What society relies upon is a faith generated by economic-thought which suggests that people will act in their economic interest which, naturally, translates into the aim of continuing to try to be successful. But, this is not reality. There is, as Sir Philip Green amply demonstrated, much to be gained (for the individual) from cutting one’s losses at the expense of many others. It is simply not the case, in the long run, that what is good for the economy is good for society, and it is this notion that Frank Field is trying to combat.

Whilst it is extremely admirable to engage in such an endeavour, it goes against the very fabric of Western society, rightly or wrongly. The ability to conduct business, without the excessive oversight of the public, is central to capitalism, and it is hard to see how this will change. It is perhaps more reasonable to suggest incremental changes, and in this regard Frank Field can lead a mini-revolution – forcing limited companies to have a representative of the pension fund members on the board of a company with 5,000 or more pension contributors may change the face of U.K. Corporate Governance, and may, perhaps, reduce the frequency of large corporate failures at the hands of surreptitious corporate raiders. For that reason, this report may be a turning point for the future of corporate governance in the U.K.