Into 2020 and against the backdrop of multiple Royal Commissions, scrutiny of board practice and governance remains intense in Australia.

We are not alone, however. Corporate collapses and misconduct have set the scene for a global governance debate, especially in the areas of the US and UK. In the US, Senator Elizabeth Warren’s Accountable Capitalism Act proposes a remake of capitalism based on recognition of broader obligations to society, and in the UK, a new manifesto on corporate governance has been released.

Given the focus on governance will continue into 2020, it is timely to consider the views of various stakeholders on approaches to lifting standards and practice in the UK. History has shown us that developments there are often, in time, mirrored here.

As in Australia, we see fundamental policy issues including climate change, income inequality and audit regulation fuse with governance principles including the role of the board and board composition, accountability and board decision-making.

Here’s what the UK Institute of Directors, the UK Conservative Party and the UK Labour Party had to say in 2019.

UK Institute of Directors

Prior to the UK general election, the UK Institute of Directors (IoD) released its “manifesto” on corporate governance outlining ten 10 policy proposals intended to:

  • Increase the accountability of the UK corporate governance system to stakeholders and wider society;
  • Improve the competence and professionalism of UK board members; and
  • Enhance the ability of board members to pursue long-term, sustainable business behaviour – including addressing the challenge of climate change.

The proposals are briefly outlined below:

  1. Support the development of an industry-led, formal Code of Conduct for Directors of significant corporate entities to guide their activities/behaviour as a professional group. The 'absence of a professional framework of conduct or ethics – which goes beyond mere compliance with the law - is of particular concern at a time when public trust in directors and business more generally remains fragile', the IoD writes.
  2. Deliver proposed reforms to the regulation of auditors and create The Audit, Reporting and Governance Authority (to replace the Financial Conduct Authority (FRC)) to ensure more robust regulatory oversight over the external audit process.
  3. Establish an independent Corporate Governance Commission to oversee the UK's corporate governance and stewardship codes framework.
  4. Prioritise upgrades to the operation and functioning of Companies House including measures to better scrutinise the accuracy of UK company data and reduce the likelihood of identity theft.
  5. Mandate minimum requirements for director training including introducing a requirement for all newly-appointed directors of significant entities to fulfil a minimum requirement in terms of director training and professional development.
  6. Encourage the adoption of a Code of Practice for board evaluation to support improved consistency in independent board evaluations.
  7. Create a framework through which companies 'can project their Business Purpose' including by encouraging companies to adopt clearly defined 'business purpose' clauses/business purpose statements, either in their constitutional framework or elsewhere in their annual report, to enable companies to communicate their expected social impact beyond 'merely maximising profits'.
  8. Encourage a consistent approach to Climate-Related Corporate Disclosures noting that consistent with the government's Green Finance Strategy, asset owners and listed companies are expected to report in accordance with the requirements of the Task Force on Climate-Related Financial Disclosures by 2022.
  9. Explore opportunities to establish an ESG oriented Sovereign Wealth Fund to invest in 'the green and sustainable companies of the future and in doing so embed the highest standards of corporate governance across the economy'.
  10. Establish a newly-defined corporate form – the Public Service Corporation - through which the outsourcing of public services and related activities could be delivered. It's proposed that such a vehicle would have shareholders and operate on a commercial basis, but its underlying legal framework would require a balance to be maintained between the interests and obligations relating to its various stakeholders, including its shareholders, employees, pensioners, creditors and public sector clients.

UK Conservative Party general election manifesto

The Conservative Party manifesto – which, as expected, was light on corporate governance reform (certainly compared to its opposition) – included promises to:

  • strengthen the UK’s corporate governance regime and reform insolvency rules and the audit regime so that “customers and suppliers are better protected when firms like Thomas Cook go into administration”;
  • study the results of the ongoing investigation into the Thomas Cook collapse; and
  • improve incentives to attack the problem of excessive executive pay and rewards for failure.
How is the AICD responding to contemporary governance debates?

See the AICD’s forward agenda consultation paper, results and next steps here.

The party committed to “striving to achieve the right regulatory balance between supporting excellent business practice and protecting workers, consumers and the environment” including through a “Red Tape Challenge” intended to ensure regulation is “sensible and proportionate”.

UK Labour Party general election manifesto

Despite the Conservative Party’s clear election victory, it is worth also reflecting on the Labour Party’s corporate governance and accountability manifesto proposals – not just because they represented a push for a radical shake-up by a major political party, but also because aspects of them are likely to continue to attract support from certain stakeholders.

The Labour party’s manifesto pledged to “rewrite the rules of the economy, so that it works for everyone” and “take on short-termism and corporate greed, making sure good businesses are rewarded, not undercut.”

Notable proposals included the following:

  • Require one-third of company boards to be reserved for elected “worker-directors”, enabling workers to have more overt control of executive pay;
  • Require large companies to set up “Inclusive Ownership Funds” (IOFs), with 10% of a company to be owned collectively by employees, with dividend payments distributed equally among all (capped at £500 a year);
  • Amend the Companies Act to require companies to prioritise long-term growth, while strengthening protections for stakeholders, including smaller suppliers and pension funds;
  • Amend the London Stock Exchange (LSE) listing criteria so that any company listing on the LSE that fails to contribute to tackling the climate and environmental emergency will be delisted.
  • Introduce a broader “public interest test” to prevent hostile takeovers and asset-stripping;
  • Allow struggling companies go into protective administration, so they can be sold as a going concern rather than collapsing into insolvency;
  • Separate audit and accounting activities in major firms and impose more robust rules on auditors; and
  • Tackle late payments that leave small businesses waiting to be paid, including banning late payers from public procurement.

Criticism of Labour’s policies was loud from various quarters, particularly business leaders and investors. Certainly, they would have represented a radical change in corporate governance and a very significant government intervention in a major developed economy.

Edwin Morgan, director of policy at the UK Institute of Directors, was quoted as arguing that there was too much “stick” and not enough “carrot” in the manifesto. He also noted there were “clear potential downsides” to some of the headline policies.

Regardless of the politics, changing community and government expectations and declining public trust in institutions mean that governance will continue to be debated over the coming years.