Corporate Governance in the U.K.: How a Botched Snap-Election Halted Beneficial Governance Reforms

Here in Financial Regulation Matters and across the U.K., with regards to those concerned with Corporate Governance, the collapse of the large retailer British Home Stores (BHS) has been a cause of great debate, and even greater consternation. The ease with which the company fell, and the sheer arrogance of those who caused it, led to Parliamentary investigations and a number of increasingly damning investigations from Journalists, academics, and commentators. In February, in one of the first posts here in Financial Regulation Matters, we looked at the calls to make private companies abide by the Financial Reporting Council’s Corporate Governance Code (which is aimed at Public Companies only), whilst later we also looked at the calls to enforce the implementation of workers and stakeholders’ interests at Board level, together with the proposed binding-quality of shareholder votes when it came to Executive compensation. If we take a look back into the archives of posts, a growing trend of shareholder activism, or perhaps shareholder responsibility, was beginning to form in parallel to the stated claims from the Government with regards to governance reforms. However, in the Queen’s Speech yesterday, a ceremonial event that marks out the legislative agenda of a given parliament, all of that momentum was brought to a screeching halt. In this post we shall therefore assess this development, why it happened, and what it ultimately means for governance reform.

The momentum referenced above will not be covered here, as it is has been covered on multiple occasions in previous posts. However, the governmental incarnation of that momentum will be covered, as it provides for us an excellent example of a government paying lip-service in the wake of a massive failure – what we then have to do is examine whether a. the government had any appetite to enact such reforms in the first place, and b. what this method of retroactive insincerity means for the hope of protecting the public from further wrongdoing. In 2016, the Conservative Government laid out its apparent aims for corporate governance in the U.K. with its ‘Corporate Governance Reform Green Paper’, which began with a smiling Theresa May explaining to us that ‘for many ordinary working people – who work hard and have paid into the system all their lives – it’s not always clear that business is playing by the same rules as they are’. To counteract this the Government then pledges to set out ‘a new approach to strengthen big business through better corporate governance’, which would take the form of focusing upon ‘ensuring executive pay is properly aligned to long term performance, and raising the bar for governance standards in the largest privately held companies’. In demonstrating her neo-liberal philosophy, May continues by stating that ‘these are issues which are bout competitiveness, and creating the right conditions for investment, as much as they are issues about fairness’. Leaving aside this ludicrously patronising sentiment, and the pathetic denial of the devastating effect governance failures have upon people like the 11,000 who lost their pensions in the BHS scandal, the importance of the contents of these green paper make for extraordinary reading because, to all intents and purposes, it represents the attempt of Theresa May to bring her promises of protecting ‘ordinary people’ – the nuanced effect of the repeated use of this term is incredible - from the actions of ‘unscrupulous company bosses’ to reality.

The green paper suggests that binding votes would enable shareholders ‘to hold executives to account for performance on an annual basis’, which it continues by suggesting that the development would also encourage increased shareholder engagement, which is argued is crucial to good corporate governance. A good start. The paper then goes on to discuss the ineffectiveness of ‘Long-Term Incentive Plans, and suggests that some incarnation of extending the period for Executives retaining share awards would help; it asks for more assistance from stakeholders and professionals/academics in this regard. So far so good. The paper then looks at the issue of employee and stakeholder engagement, and proposes a number of options, including creating ‘stakeholder advisory panels’, designating non-executive directors to be specified liaisons with employees and interest groups, and also appointing individual stakeholders on the Board. Promising! Yes, promising indeed, until yesterday when the focus on Brexit and backtracking on magnificently awful suggestions during the election campaign trumped corporate governance concerns entirely.

In the media, a spokeswoman for the constantly title-changing Department for Business, Energy & Industrial Strategy (BEIS) stated that the Department was ‘still to respond’ to the Green Paper (when consultations concluded in February) and that they will outline their response ‘in the coming months’. The fears that emanated before the Queen’s Speech have been justified, and quite rightly have caused a vociferous reaction, with the Trades Union Congress (TUC) arguing that ‘people are fed up with one corporate scandal after another and reform is long overdue’; the absolute absence of Corporate Governance reform in the Queen’s Speech means that, for the next couple of years at least, there will be little change to the regulatory framework in the U.K.

Ultimately, there are a number of ramifications to this development. One is that it is clear that the electorate do not punish lip-service; this is not the first time that those in the Conservative Government (and if we are to be fair, nearly all political parties) have said one thing and then done another. Another aspect is that the regulatory framework will now not be altered until the Brexit negotiations have concluded, which is both a positive and negative: positively, it allows for the Government to react to the new environment with a newly enhanced framework; negatively, it allows for the Government to react to the new environment with a newly enhanced framework – the fears that the Government will turn the Country into a tax-haven can be realised by a new and more lenient regulatory framework. The absence of governance reform also demonstrates the belief of the political elite that ‘ordinary people’ do not understand or have the appetite to care about corporate governance, and they have thus focused on more politically visible issues like Brexit, and energy bills. However, this is a reality created by the political elite’s rhetoric, combined with the assistance of the mainstream media – in reality, people do care greatly about corporate governance and the effect it has on their employment, their pensions, and many other aspects; the reality is that affecting corporate governance reforms will reduce the profit and bonuses of big business, and this is simply not an option for the Conservative Government because, as Theresa May so nonchalantly declares, ‘the Government I lead will be unequivocally and unashamedly pro-business’ – perhaps this represents the other end of the scale to the notion of ‘ordinary’ that she so patronisingly refers to.