UK equities
14 May 2019 | By Richard Buxton

The new UK corporate code – Fit for purpose?

The revised UK corporate governance rules include some radical changes that could help to rebuild public confidence in business.

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Richard Buxton, portfolio manager for the UK Alpha Fund, says corporate governance is a key consideration when making investment decisions for the fund.  He says the revised UK governance code for companies includes some radical changes that could help to rebuild public confidence in business.

Last year, following extensive consultation with companies, asset owners and asset managers, the Financial Reporting Council issued a revised UK Corporate Governance Code – the latest in an evolving line stemming all the way back to the original Cadbury Code established in 1992. Companies should be acting in accordance with the new Code this year and reporting on how they have done so in their annual reports on 2019 published next year.

The new Code is shorter and built around a set of Principles alongside more detailed Provisions. The aim is to be less ‘rules-based’ in favour of a more generic set of standards and behaviours which are to be expected.  The flexibility offered companies by choosing to ‘comply or explain’ remains central. One size does not have to fit all, if there are perfectly good reasons for key aspects of corporate behaviour to differ.

That said, I do think that the new Code is a pretty radical document. Let me quote the first two Principles:

A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.

B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.

Over the years, I have had countless conversations with company management teams where the notoriously imprecise wording of section 172 of the Companies Act 2006 ( Duty to promote the success of the company) has been interpreted as the equally notorious ‘maximising shareholder value’. Often management have argued that whilst it is a subsidiary duty to take into regard stakeholders such as employees, suppliers, customers, the community and the environment, these are all subordinate to delivering growth for the long term success of the company.

Not any longer.

Yes, generating value for shareholders is there, but so is contributing to wider society, being sustainable, having a purpose and values. And don’t think that the purpose can be a Harry Enfield-style ‘Loadsamoney’ one. 

Moreover, the ‘board should understand the views of the company’s other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.’ So not only is the board duty bound to consider all of these interested parties in running the company but report on how they have done so, with evidence.

This feels like quite a significant shift in the landscape.  If as a company you do not currently have an explicit stated purpose, you need to define one. In your current board meetings you need to be discussing your employees, your customers and your suppliers, alongside your environmental impact and sustainability, your impact on the communities in which you operate and in wider society.

That is quite a meaty set of agenda items for boards.  I have discussed this with a number of company chairs in recent weeks. The dispiriting consensus seems to be that reporting on governance has got out of control and these new requirements will just lead to more boilerplate reports. Not, I should stress, that company chairs do not take seriously the governance and oversight of their companies, but the reporting cart appears to be in front of the governance horse.

It would be a great shame if the new Code does lead to fluffy prose about values, culture and purpose and not much else. Public distrust of business is high. The societal ‘licence to operate’ is wearing very thin. Companies have a huge opportunity to reset their relations with all their stakeholders to demonstrate that business can generate returns, create jobs and wealth without ripping off customers, employees or wider society.

Embracing the spirit of the new Code rather than worrying over every one of its Provisions can over time help rebuild public confidence in business and show that companies are indeed fit for purpose.