After a number of high profile corporate governance failings, such as those relating to BHS and Sports Direct, the UK Parliament’s Business, Innovation, and Skills (BIS) Committee recently launched a corporate governance inquiry.
The inquiry will look at a number of key issues, but in particular will be focused on executive pay, directors’ duties, and the composition of boardrooms, including worker representation and gender balance in executive positions.
Terms of Reference
With regards to directors’ duties, the terms of reference of the inquiry include:
- Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
- Is the duty to promote the long-term success of the company clear and enforceable?
- How are the interests of shareholders, current and former employees best balanced?
- How best should the decisions of Boards be scrutinised and open to challenge?
- Should additional duties be placed on companies to promote greater transparency, e.g. around the roles of advisors.
- Should Government regulate or rely on guidance and professional bodies to ensure that Directors fulfil their duties effectively?
On the subject of executive pay, the inquiry will examine:
- What factors have influenced the steep rise in executive pay over the past 30 years relative to salaries of more junior employees?
- How should executive pay take account of companies’ long-term performance?
- Should executive pay reflect the value added by executives to companies relative to more junior employees? If so, how?
With regards to the composition of boards, the areas to be examined include:
- What evidence is there that more diverse company boards perform better?
- How should greater diversity of board membership be achieved and what should diversity include?
- Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?
- What more should be done to increase the number of women in Executive positions on boards?
Need for Good Corporate Governance
"Private enterprise and a respected business community is vital to the UK's future prosperity and contributes to the funding of our schools, hospitals, and infrastructure,” explained Chair of the BIS Committee, Iain Wright MP. “Irresponsible business behaviour and poor corporate governance ill serves workers, but it also tarnishes the reputation of business and undermines public trust in enterprise.”
“We need to look again at the laws that govern business and how they are enforced,” he added. “Good corporate governance shouldn't be a hindrance to business; it can contribute to companies' long-term prosperity and performance as well as showing to the world that a business is transparent, accountable and responsible.”
Reaction to the Inquiry
Both the Institute of Directors (IoD) and the TUC welcomed the launch of the inquiry.
Simon Walker, Director General of the Institute of Directors commented that the reputation of corporate Britain has not recovered from the financial crisis, and there are important questions that need to be addressed on issues including transparency, executive pay and board diversity.
Frances O’Grady, TUC General Secretary, described the inquiry as “important and timely” and said that the TUC was looking forward to contributing to the Committee’s discussions.
Contains Parliamentary information licensed under the Open Parliament Licence v3.0.
For expert legal advice on these issues, or other areas of commercial law, then contact our commercial lawyers today.