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How will BIS inquiry affect corporate governance?

29 / 11 / 2016
How will BIS inquiry affect corporate governance?The Business, Innovation and Skills (BIS) Committee recently launched a new large-scale inquiry into corporate governance in the UK, following the much-publicised scandals that rocked Sports Direct and BHS this year. 

Both retailers underwent BIS inquiries in 2016, with Sports Direct's employment practices under fire and BHS bosses slammed for allowing the organisation to go into administration with a huge pensions deficit. 

Sports Direct had several policies that were considered unfair to staff, including a 'six strikes' rule that saw employees fired for taking toilet breaks and time off work to care for sick children. Warehouse workers were also receiving less than the National Minimum Wage due to the time spent getting searched after their shifts. 

Meanwhile, former BHS owner Sir Philip Green was investigated for selling the business to Dominic Chappell for just £1, despite the latter suffering three bankruptcies and having no previous retail experience. The company folded a little over a year later with a pension pot that was approximately £571 million short. 

But which areas of corporate governance will the BIS inquiry cover? What changes could occur? And how may the inquiry affect businesses and professionals in the future? 

Key focus points

The BIS announced it will commit to three areas of investigation: directors' duties, executive pay and the composition of boards. These align with key focuses that prime minister Theresa May mentioned earlier this year when discussing overhauls to corporate governance in the UK. 

Let's examine some of the questions the BIS will be expected to answer following the inquiry. 

Directors' duties

  • What is the best way to scrutinise boards?
  • Are director and non-director roles clearly defined in existing company law? If not, how should legislation be altered? 
  • How can corporate governance best balance shareholder and employee interests?
  • Should public and private organisations have more similar governing rules? 
  • Should businesses be under more pressure to show transparency? 

Executive pay

  • What factors have resulted in executive pay rising so significantly over the last three decades when compared with junior salaries?
  • In what ways can executive pay be linked to company performance?
  • Is executive pay too high and should the government seek to exert influence on how salaries are set?
  • Should pay better reflect the value executives add to a company in relation to junior employees?
  • Should shareholders have a bigger role in controlling executive pay?

Composition of boards

  • Is there evidence to suggest more diverse boards perform better? 
  • What measures can be taken to achieve greater diversity? 
  • What should diversity targets include? For example, ethnicity, disability, socioeconomic background, sexuality, age, gender or other? 
  • Should more be done to boost gender diversity for executive board positions?
  • Do workers need representation on boards and salary committees? How should this be achieved?

Industry reactions to the inquiry 

Many organisations have announced their support for the BIS inquiry, which received submissions from stakeholders until October 26th. 

Frances O'Grady, TUC general secretary, described the inquiry as "important and timely".

"Poor corporate governance contributes not only to high profile corporate disasters such as BHS, but also to short-termism and excessive executive pay across much of the private sector," she stated. 

ICSA: The Governance Institute also welcomed the news, stating that a closer inspection of current regulations is overdue. The organisation claimed there was a low ebb in trust towards businesses and their approaches to corporate governance. 

Peter Swabey, policy and research director, stated that the terms of reference in relation to directors' duties, executive pay and the composition of boards cover key matters that need addressing. 

"ICSA has been working on a number of constructive ideas to address the issues of modern governance across all sectors and we will be delighted to share these with the committee," he explained. 

What happens next? 

Parliament is yet to release further dates regarding the next steps of the inquiry, although it can be assumed MPs are currently analysing the submissions received up until last month. 

Given the large scale and breadth of coverage of the inquiry, the UK business landscape could experience significant changes in the future that could reverberate throughout various functions within corporate governance. 

Whether this will create further opportunities for professionals as organisations look to strengthen inner processes is yet to be seen. However, the outcomes from previous regulatory increases would suggest the chances are good that businesses may require better risk, compliance and audit capabilities. 

In the meantime, we'll keep you up to date on the latest developments from the BIS inquiry and other key news that could affect corporate governance recruitment. 

Our 2016 Compensation and Market Trends Reports combine our review of the prevailing conditions in the corporate governance recruitment market together with the results of our latest employer survey.

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