Governance Watch in 2019

“As we enter 2019, it is clear that corporate governance issues and concerns abound - not just in the United Kingdom, but well beyond our shores. As a boardroom consultancy, we operate globally, and the strains on public trust in business and government are evident everywhere.

Anyone with a foot in the boardroom needs an easily digestible digest of issues in the headlines to keep at the forefront of their minds as they consider their own role and the needs of their business. It is the reason why we feature Governance Watch, and are pleased today to offer a 50th issue.

2018 was a busy year to digest fresh thinking around what constitutes good governance, as reflected in the Charities Code, the Wates Code for large private businesses and the new UK Corporate Governance Code. As an experienced Chairman and Board Member, I maintain a keen interest in ensuring that appropriate standards of governance are developed and adhered to – because it cuts to the heart of public trust in business, and therefore its sustainability. Boardroom dynamics are key to the effective discussion and implementation of those standards, and as a boardroom consultancy, we are passionate about getting those right.

There is a great deal to think about, and there is also Brexit. After a myriad of accounting scandals, we have had the inadequacy of the regulator, the Financial Reporting Council (FRC) acknowledged by the Kingman Review. Business is watching to see what happens next for the big accountancy firms, and how they are regulated. High levels of executive remuneration remain a focus of public concern around business behaviour, while further company collapses threaten economic hardship for many and a further deterioration of trust.

On diversity in all its forms, there is still much progress to be made. The government has legislated to require businesses to reveal gender inequality as reflected in pay and the deliberations of its consultation on forcing companies to reveal the ethnicity pay gap are due very soon from Baroness Ruby McGregor-Smith. These steps thrust important issues into the limelight by demanding transparency and keeping up the scrutiny. But they are tools for the real problem we need to focus on, which is building a diverse pipeline and fulfilling the need for trained and qualified non-executive directors (NEDs).

Under the UK’s new codes, NEDs are being pushed more and more into the executive space, with requirements to oversee culture and succession further down the organisation. There is a plethora of information thrown at all of us and those with boardroom responsibilities are often suffering from a deficit of time. We hope you find reading Governance Watch a useful addition to your reading material, and wish everyone a constructive and prosperous 2019.”

Helen Pitcher, OBE

Governance Watch - Issue 50

by Dina Medland in London

Diversity, Inclusion and Progression

We are more than half way into January, and when it comes to politics, the New Year feels very much like the old one. Facing multiple challenges around technological transformation, skills shortages and changing consumer aspirations, much of British business has been tearing its hair out on the uncertainty around Brexit for over two years. During that period the UK government has, in its pursuit of best practice and the lure of Britain for business and investment, taken many steps to raise the bar on corporate governance.

As 2019 gathers momentum, it might be that nothing is more important than action on real diversity and inclusion across race, ethnicity, gender and ability, particularly in the shadow of Brexit. Business needs the skills of every single individual who wishes, and is able, to contribute to its economic progression.

Brexit revealed one socio-economic divide, but the focus on finding a way towards its successful completion since the vote may have masked many other pressing national issues that need to be tackled for better productivity and economic growth, not to mention better governance.

A study by experts based at the Centre for Social Investigation at Nuffield College, University of Oxford, part of research for a larger cross-national project funded by the European Union and shared exclusively with The Guardian newspaper before its official launch, has prompted concerns about whether race relations legislation in the UK has failed, the paper reports.

Responding to the study, Matthew Fell of the Confederation of British Industry is reported to have said: “Any bias is bad for business. Companies must act now to eradicate all forms of discrimination, including any bias in recruitment.” Indeed. Otherwise business risks shooting itself in the foot when it comes to progression.

For a start, the very digital skills that are needed for the Fourth Industrial Revolution and in the fight for cybersecurity may come from an existent resident population that, to put it bluntly, is not white.

I have long argued in other writing that “unconscious bias” -while a great slogan for HR departments to spend their cash on and then applaud themselves on social media for doing so- is something of a red herring.

Britain needs to tackle its very conscious biases on challenges to the status quo: be it women at the top of its businesses and in its boardrooms in equal number as men, or faces that are not uniformly white in the boardroom, whatever the gender.

This report on racial discrimination is timely. Baroness McGregor-Smith, who produced a report for the UK government on Race in the Workplace, is expected this month to report following the consultation on making pay by ethnicity reporting mandatory. Legislation on that would bring transparency and a spotlight on reputation for many British businesses.

However, looking at progression for women – even white women – in Britain’s boardrooms, many will be watching to see if even legislation brings about any change.

Executive Remuneration

The issue of trust in business – or the lack of it, particularly in Britain– remains at the top of the corporate governance agenda. Yet there is a disconnect between lip service on tackling the problem and facing up to action on excessive executive remuneration, as I wrote recently on Board Talk.

There are no signs however that this concern, fundamentally at the heart of better corporate governance, is going to go away.

Covering as it does multiple issues around privilege and possibly a sense of entitlement of the few, with networks to support them, of gender progression in business or the lack of it (and therefore further economic inequality by gender), of linking opportunity and reward across the running of a business in the name of fairness, there is a lot to think about.

Consider also the role of business in society and the importance of human capital in the success of any business. Levels of pay matter on a very real, identification by employees with employers as ‘us and them’, gut-wrenching level.

Rather than ‘golden handshakes’ and ‘golden parachutes’ in the parlance of corporate earnings, it seems to me we need to hear more about ‘golden tickets’ of opportunity for those willing to commit to be trained and rise within any UK business. This would be true even if Britain were not to leave the European Union, but Brexit makes it a no-brainer.

The UK government has asked businesses to report on pay levels by comparison within business, and it is an important step forward. But real executive pay levels are often easily fudged by a coterie of professional advisers tied together by vested interests, and conflict of interest is what rots the core of better corporate governance.

Accounting and Audit

As Helen mentions above, the future direction of the accounting profession and its regulation, and the scrutiny of audit is a critical development for businesses and investors to watch in 2019.

It’s complicated, involving as it does both a fundamental rethink of better accounting rules and clearer definitions of the lines of corporate responsibility, as well as looking at the dominance of the Big Four. As ever, transparency and very specific accountability are key to progress.

One only has to look at the latest news on the saga at Patisserie Valerie, to find an absence of both those things.

The dual roles of ‘audit’ and ‘consulting’ offered by the Big Four firms are surely ready for a hard look, going forward.

Gig economy/Workers Rights

Most good thinking comes full circle in the end. The UK government has done a great deal to implement 51 out of 53 recommendations of yet another review into business by looking at the modern workplace – the Taylor Review.

But Britain’s unions believe it has missed a fundamental opportunity to rebalance power, by not banning zero-hours contracts, as the world of work changes rapidly.

If the goal is ‘fairness’ as part of better corporate governance for better business, in an age where technology is allowing data access like never before it might prove interesting to see a data map overlay of who those zero-hours contracts are, in terms of the composition of British society, by ethnicity, race and gender.

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