Britain Braces For Big Corporate Governance Changes In 2018

In 2016, the sale and collapse of BHS became a national scandal. The beleaguered retailer was estimated to have a pension scheme deficit totalling nearly £600 million and many questions were asked about the circumstances under which the business was purchased.


Sir Philip Green, who had sold BHS in 2015, finally agreed to pay £363 million to help plug the gap last year. However, the Pension Regulator took a dim view of Mr Green’s prior behaviour, claiming that his primary objective for handing over control of BHS was to avoid liability for the retirement fund.


Now, facilities management and construction firm Carillion is the latest business to go bust in circumstances where corporate governance processes have been called into question, and a different Philip Green is under the spotlight. Mr Green is the company’s chairman and once advised former prime minister David Cameron on corporate responsibility.


He is likely to face a similar grilling about Carillion’s internal processes, with Sky News claiming the organisation’s pension deficit could run as high as £2.6 billion.


Prime minister Theresa May has claimed the government will clamp down on companies that abuse pension schemes in the future. She has already announced a raft of measures, which are set to come into force later this year. But will these reforms have the desired effect?

The new UK Corporate Governance Code

Other changes are also afoot for corporate governance. The Financial Reporting Council (FRC) published new proposals in December for revising the UK Corporate Governance Code.


The FRC said the reforms would provide a shorter and sharper code that emphasises the importance of long-term success and sustainability at British listed businesses.


“At this critical time and as the country approaches Brexit, a revised Code will be essential to restoring trust in business, attracting investment and ensuring the long-term success of companies for members and wider society,” said Sir Win Bischoff.


“Engaging with and contributing to wider society must not been seen as a tick-box exercise but imperative to building confidence among stakeholders and in turn the long-term success of a company.”


The full proposals for the new Code can be read here. Broadly, the changes are expected to:

  •  Establish company strategies and purpose, as well as ensure these align with the organisation’s culture;
  •  Gather opinions from company workforces;
  •  Work more closely with a wider range of stakeholders and improve trust in commercial entities;
  •  Provide more specificity on actions that face significant shareholder opposition, such as executive pay increases and awards;
  •  Ensure board appointments are based on merit through objective criteria; and
  •  Promote social, gender and ethnic diversity.

The Code is not mandatory, but businesses often comply rather than exercise their right to explain to shareholders why they choose not to.

Boardroom reshuffles on the horizon?

If implemented, the reforms could cause a stir across UK boards. Executives are already questioning one proposal in particular, which suggests that company chairs should step down after nine years on the board.


The aim is to prevent staleness at the top of organisations, but the Financial Times has reported that 67 chairs could be affected if the proposal was approved. Nineteen of these would be FTSE 100 heads.


Big wigs who might be expected to step down would include Alison Carnwath of Land Securities and John McAdam, head of Rentokil Initial and United Utilities. They have both been in their roles for more than nine years.


Furthermore, the proposal for chairs at FTSE 100 companies would encompass any time spent in non-executive director positions. For instance, Sarah Bates of wealth manager St James’s Place was only made chair of the business in 2014, but she was appointed to the board as a non-executive director a decade earlier, bringing her total tenure to 14 years.


“This provision may get a lot of pushback from both corporates and investors. The FRC is right to focus upon the issue of chairman tenure, but I don’t think it should be so mechanistic,” a corporate governance professional told the Financial Times under conditions of anonymity.


“If you have someone who has been on the board for five years and is a natural person to go on to become chairman, you don’t want to acknowledge that they can only be chairman for four years.”

Will 2018 be the year of change?

It seems 2018 is already shaping up to be a year where corporate governance takes centre stage in UK business and political circles.


In her run for the Conservative leadership, May claimed she would come down hard on businesses that shirk their social responsibilities, but she has since been accused of “feeble” and “watered down” reforms.


The Carillion collapse is likely to bring increased focus on the government’s approach to UK corporate governance, given that that firm continued to receive lucrative public sector contracts despite its shaky finances.


It’s difficult to predict how these changes will affect corporate governance recruitment. We would expect increased demand for skilled professionals if current rules are reformed and strengthened, although there are wider socio-economic factors – such as Brexit – that will also play an important part in the months and years ahead.


If you would like to discuss your corporate governance recruitment needs, or are keen to explore new career opportunities, please contact us today.


Our 2017 Compensation and Market Trends Report combines our review of the prevailing conditions in the corporate governance recruitment market together with the results of our latest employer survey.