Corporate crackdown? Businesses told to consider workers interests in new code that they can ignore if they want to

The new corporate governance code works on the basis of comply or explain, a major failing of the previous one that lets bad businesses off the hook

James Moore
Chief Business Commentator
Monday 16 July 2018 11:37 BST
TUC general secretary Frances O'Grady says the new Corporate Governance Code doesn't go far enough
TUC general secretary Frances O'Grady says the new Corporate Governance Code doesn't go far enough (AFP)

British companies are, for the first time, being told to pay regard to the people on whom their success rests: their employees.

In many ways that step, contained in the Financial Reporting Council’s new “shorter, sharper” corporate governance code, is an important one.

Workers haven’t previously merited a mention but the regulator’s revised code asks boards to “describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act”.

Directors are also asked to “create a culture which aligns company values with strategy and to assess how they preserve value over the long term”.

Again, that’s very worthy. Group hug everyone.

Inevitably, there’s a reference to the vexed issue of bosses pay, which continues to cause scandal. Remuneration committees are told to “take into account workforce remuneration and related policies when setting director remuneration”. Formulas that lead to bonuses like those at Persimmon Homes, the builder that handed top managers a combined £600m, “should be rejected”.

The FRC was moved to congratulate itself for creating “a corporate code that is fit for the future”. There were warm words from business secretary Greg Clark too.

Well huzzah for that!

In reality, the phrase “nice enough but a bit limp” would more honestly cover what’s being served up.

Sure, the principle of telling companies to pay due regard to the interests of employees and other, um, “stakeholders”, is important.

TUC general secretary Frances O’Grady described it as a step in the right direction.

But, as she went on to say, it hardly represents the sweeping shake up Prime Minister Theresa May once promised.

There won’t, for example, be mandatory worker representation on boards as there is in much of Europe, where companies are often better run.

There won’t, in fact, be mandatory anything.

The new code works like the old one in that it operates on the basis of comply or explain.

If companies want to ignore some, or even all of it, they are at liberty to do so. All it takes is a note in the annual report: “The board feel that provisions X, Y and Z are inappropriate for the business so have decided not to comply with those parts of the code.”

Translation: “We think it’s a load of rubbish so screw you.”

It’s a bit like the police saying you can get away with burgling someone’s house if you just say why you think it’s necessary for you to do so.

In theory, shareholders are supposed to take to task companies that treat the code in a cavalier manner. In practice they don’t.

It bears repeating that there were repeated occasions during which investors could have raised the issue of the atrocious payouts Persimmon’s bosses were handed, bonuses that harmed their and the company’s best interests.

They abjectly failed do so until the media kicked up a fuss, by which time it was far too late.

Sure, good companies, those wanting to be seen as leaders and exemplars of best practice, will follow the rules. Some might even deign to appoint workers to their boards. More likely they’ll settle for employee engagement councils attended by a non-executive director or two.

But good companies really aren’t the issue, because good companies will already be doing things like engaging with their workforces.

This latest reformed code is better than the previous one. But it will still, in all likelihood, fail in its aims to restore the public’s declining faith in business because the bad companies that cause all the problems will be able to carry on as they always have.

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