The UK needs to implement corporate governance reform as part of plans to boost the economy as it leaves the EU according to the Institute for Public Policy Research’s (IPPR) Commission on Economic Justice that is rethinking economic policy for post-Brexit Britain.

In its latest report, the IPPR’s Commission suggests that corporate governance reform is vital to the long-term success of the UK economy and that some of the country’s current challenges relate to the current model of governance. Part of the problem the Commission believes is the primacy given to shareholders in the British model which the report suggests has led to short-termism.

The Commission said that as the average length of shareholding has fallen – from six years in the 1950s to six months now – a misalignment of incentives and behaviours has been created between companies, their shareholders and financial intermediaries. As a result of this, the report said that there has been being is manifested in a decline in investment and a rise in the proportion of earnings distributed to shareholders, with poor long-term results both for savers and companies themselves. Between 1990 and 2014, the proportion of discretionary cash flow returned to shareholders (including dividend payments and share buybacks) from UK non-financial
corporations increased from 39% to 46%. Only around 25 per cent of finance raised by companies is now spent on investment, the report stated.

The UK’s governance model has also contributed to UK’s low productivity due to the exclusion of employee voices, the Commission believes. The report said that employee engagement is a key factor in raising productivity, but had been a consistent weakness in British management culture. Additionally, the Commission suggested that the existing model of corporate governance had contributed to a culture of rising executive pay.

The report notes that most leading European economies give greater voice to key stakeholders, including employee directors on company boards and in the remuneration process. There is also no legal reason why shareholders have so much power within UK companies while the nature of current investment practice which means shareholders are often overseas investors and increasingly hold shares for a short period of time means the argument for the primacy of shareholders in the governance model is a weak one.

The Commission has therefore proposed three key reforms which it believes will address the current weaknesses in the governance model it has identified. These are the reform of directors’ duties to promote the long-term success of companies and widen their intended beneficiaries beyond shareholders alone;  introducing employee representation into the formal governance of large
firms, including on the main board and remuneration committee and the establishment of a Companies Commission that would take on the corporate governance responsibilities of the current Financial Reporting Council (FRC). This Commission would provide stronger oversight and regulation of corporate governance in both listed and large private companies. The report said this could be done by strengthening the role of the FRC or creating an entirely new body.

The FRC itself has said that it believes that its powers need strengthening and changes need to be made so that it can hold all directors to account for corporate governance failings – not just if they are a member of a professional body. In its response to the parliamentary select committee inquiry last year into corporate governance and the government’s corporate governance green paper earlier this year the FRC said it needed more enforcement power.

The FRC also said that the duty, contained in Section 172 of the Companies Act, on directors of all companies to promote the success of the company, and in so doing have regard to a range of other factors, such as long-term consequences, the environment, employees, suppliers and customers needed to be reinvigorated. Additionally, the FRC said,  that companies should be required to report more effectively on how they have discharged this duty.

The IPPR’s Commission was launched in November 2016, and it brings together leading figures from across society – from business and trade unions, civil society organisations and academia – to examine the challenges facing the UK economy and make practical recommendations for reform.

Last Updated: 21 July 2017