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The future of corporate governance: how can business make corporate governance fit for purpose?

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Last week (3 July 2018), the British Academy hosted a breakfast briefing on corporate governance as part of its ongoing Future of the Corporation programme.

Corporate governance really comes to people’s attention when businesses people know and rely on seem to disappear overnight and leave huge problems in their wake. In January 2018, the collapse of Carillion left a large pension deficit, thousands out of work and suppliers facing unpaid bills. This followed the 2016 collapse of BHS, which left 11,000 employees out of work and a similarly sizeable pension deficit.

What can better corporate governance do to prevent these collapses? Can better governed businesses go beyond the apparent limitations that leave businesses focused on short-term expansion and quick profits, at the expense of greater sustainability? And can corporate governance assist with addressing problems of inequality and economic adjustment, and encourage growth and investment?

Discussing these questions at the briefing were Sir Win Bischoff, Chairman of the Financial Reporting Council in the UK and Chairman of JP Morgan Securities plc; Claudia Arney, a non-executive director of Aviva plc among others; and Julian Franks, Professor of Finance at London Business School.

Sir Win Bischoff opened the discussion talking about the alarming context and issues we face. Fair taxation, stagnant growth and living standards, insecure employment contracts and a decline in trust in business have contributed to a noticeable shift, both politically and amongst the general public. Driving home his point, he argued that, “Boards must have greater regard for their workforce, suppliers and a broader community in which they operate”. He went on to argue against 20th century economic doctrine, that boards are the agents of shareholders. “[Boards] should have as their prime responsibility, the health of the enterprise rather than the wealth of shareholders. This includes the health of employees, broader stakeholders and shareholders, as well as a healthy regard for their innovation and strategic renewal and investment for the future.”  

In his role chairing the Financial Reporting Council, Sir Win spoke to the value and role of the Corporate Governance Code, arguing that only people, particularly the leaders of a business, can prevent inappropriate behaviour. He concluded by pointing out how business can address governance issues, public perceptions and decline in trust. “A fundamental re-examination of what a company's corporate purpose is and who a company should serve to ensure their long-term success is a very good start.”

Bringing many years of boardroom experience to the discussion, Claudia Arney spoke about the complexities boards face. “Governance is too hard to measure,” she said. “We don’t have a holistic measure and that makes it very hard as a director to know whether we’re delivering good governance or not.” She also talked about the way ownership dramatically affects behaviour and governance. Her roles on the boards of publicly owned corporations like Ordnance Survey, PLCs like Halfords, regulated companies like Aviva and even unusually structured businesses like the Premier League, have highlighted the ways different stakeholders influence a business. 

Reflecting that, “In a regulated business, it is often the case that the regulator becomes the 'proxy-owner' of the business,” Arney highlighted that the institutions that own most of the shares in our public companies are not always playing the role that they are expected to play in the complex systems of governance we rely on. She went on to talk more about the challenges of complexity and consistency right along the chain of ownership and delivery before returning to the point that deeper consideration for a wider set of stakeholders was necessary.

Julian Franks launched his talk by contrasting two types of investment fund. One active fund, with €15bn under management invested in 12 companies with 30 investment professionals; and another passive fund with more than $1,000bn under management, yet still only 30 people in its governance function. Where active funds involve investors playing an active role in engaging with the business, passive funds involve portfolios that track the main major indices like the FTSE100 and S&P500. Professor Franks made a significant point of contrasting these two investment strategies and linked this to the impact of ownership trends on corporate governance. He made the point that increasing use of passive funds results in a lack of investment in monitoring by fund managers. Ultimately, he argued that governance has been mis-cast as a cost-centre for businesses as the costs of poor governance are not recorded: “Governance should be considered a profit centre when it is well done. When you target one company and improve their performance, other companies take note and improve their performance too.”

The discussion then opened up to questions from the guests and touched upon the limitations of Section 172 of the Companies Act (2006) as a mechanism to ensure all stakeholders are involved, the benefits of unitary boards, the use of proxy advisers, the challenges of engagement and conflict within the board, the importance of bringing technological skills into boards, and the democratisation of the governance process.   

The over-riding conclusion of the event revolved around the question of ownership and the impact of two major trends: significant increases in the reliance on passive, index-tracking funds which outperform active funds but fail to enable investors to act as owners; and the huge increases in the complexity of governing major modern corporations. This has created a major challenge to a system of governance designed for a different age. 

The Future of the Corporation is a major research and public engagement programme aiming to develop an evidence base that will serve as a foundation to redefine business for the 21st century and build trust between business and society.

Its first phase research will be published in October.

Find out more about the British Academy Future of the Corporation project or register your details to receive updates and event invitations.

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