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Diluted reforms, but tackling dysfunctional boards even more important

Diluted reforms, but tackling dysfunctional boards even more important

🕔26.Sep 2017

The watering down of suggested reforms to how companies are run has been the focus of attention recently, especially in relation to boardroom pay. Karl George, a leading expert in corporate governance, reflects on why it is such a timely and important debate.

A number of crises in private and public bodies – from the credit crunch ten years ago to, perhaps, Grenfell Tower and our own city council more recently – can be traced back, wholly or in part, to failures in corporate governance.

It is 25 years since the publication of the Cadbury Report which was the forerunner to today’s UK’s Corporate Governance Code and a major influence on international best practice. Now, we are looking at a set of reforms which have been thinned out since Theresa May told her party conference in Birmingham last year that: later this year we will publish our plans to have not just consumers represented on company boards, but workers as well.

So, does corporate reporting work in helping to achieve better governance and do the current proposals go far enough?

Part of the current controversy among shareholders and the wider public is about corporate excess.

At the end of last month, Business Secretary Greg Clark set out the Government’s corporate governance latest proposed reforms to enhance the public’s trust in business:

  • New laws will force all listed companies to reveal the pay ratio between bosses and workers
  • All listed companies with significant shareholder opposition to executive pay packages will have their names published on a new public register.
  • New measures will seek to ensure employee voice is heard in the boardroom. For the first time listed companies will have to publish pay ratios between chief executives and their average worker.

In essence we are relying on reporting mechanisms to drive change through the principles of openness and transparency. This, we hope, will result in a change in culture, behaviour and practice.

As we know, the plans originally outlined by the PM also included having workers involved with the leadership – sitting at the boardroom table.

Putting workers onto boards given the structures of companies and boards in the UK seems to have proved too difficult.

But, we do need to address the make up of Boards in private and public companies as well as the public and charitable sectors. We need to recruit and train directors from a much wider range and depth of our communities.

The custodian of the current governance reporting regime is the Financial Reporting Council (FRC). A ‘comply or explain’ regime is used, also followed by 50 other countries.

The FRC’s mission is to promote high quality corporate governance and reporting to foster investment. The building of trust through good governance and transparent reporting is fundamental to the success of individual businesses and to a healthy economy.

If we want to foster a culture of investment and at the same time build trust then getting the reporting framework right is incredibly important.

So, the question is will the reforms be enshrined in the UK Corporate Governance Code or in new legislation?

The reforms are a step in the right direction and will help us to have better businesses. But, let’s move the discussion onto what the drivers of board behaviour are and why boards make bad decisions.

I am convinced that tackling any type of governance challenge will require robust and rigorous compliance regimes but the process of improvement, transformation and better practice can only come from a change in the range and mix of characters around the boardroom table.

If we want businesses to make different decisions then we have to be able to influence the ways boards think and how they behave. It requires a fundamental shift in attitude and approach.

In my latest book, The Effective Board Member, I explore many of these themes and have identified a set of generic characters that are to be found in many boardrooms.

Changes to legislation and to the governing code are important, but so too is addressing dysfunctional board behaviour.

That will take all of us and certainly more than just the person who sits in the chair of a board which at many times throughout history has been described as “dysfunctional”!

‘The Governor’ – Karl George – publishes his latest book, The Effective Board Member, today. You can meet peacock, bee, penguin and rabbit in the book which is available on Amazon.

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