Our Corporate Governance Expert Group contributed to our response to the Business, Innovation and Skills Select Committee's inquiry on corporate governance.
We noted that corporate governance is an area where much that is already on the record still holds true and encouraged the Business, Innovation and Skills Committee to assess all of the work in the area, in particular the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code) and the Financial Reporting Council's (FRC) UK Corporate Governance Code, as well as work carried out by the Department for Business, Energy and Industrial Strategy (BEIS) and Parliament.
We commented that the codification of directors' duties into the Companies Act 2006 had been a positive change in legislation and that it had achieved its purpose in enabling directors to identify their duties in a simple manner to the extent that no new legislation is necessary. We encouraged the Government to sufficiently resource BEIS to both enforce the existing laws in place and promote good governance practices.
We commented that remuneration arrangements for executive directors are an important factor in ensuring that they are motivated to create value for shareholders. We noted that there was no evidence of systemic high executive pay within the small and mid-size quoted company sector. We remarked that companies should approach matters of remuneration in a way that is proportionate, rational and measured, as well as being be clear and transparent. We encouraged the Business, Innovation and Skills Select Committee to read the QCA's approach to remuneration in our Remuneration Committee Guide.
We commented that shareholders should be encouraged to take an active interest in the company they have shares in. We added that shareholder engagement can encourage the company to improve its corporate governance measures, which can lead to better performance of the company. Nonetheless, we noted that shareholders should trust directors to do what is right and that good directors deserve such trust.
We remarked that company board diversity is integral to enhancing the effectiveness of boards and provides companies with a broader skill-set, thus ensuring that they are better prepared to respond to an ever-changing and uncertain economic environment. We noted that greater diversity of board membership can be achieved through regulatory measures such as imposing quotas and enhancing disclosures using a comply or explain approach or, alternatively, by trying to change the corporate culture of the business.
We noted that requirement to have workers on boards who are not directors by reason of their function could lead to many adverse and unintended consequences, even if problems with definitions can be overcome. We commented that any change to the current board structure would challenge the test of independence set out in Section B.1.1 of the UK Corporate Governance Code, creating an unusual hybrid where a worker-appointed director is, effectively both a full time employee (in a director role) and a non-executive director.
