Do we need to review corporate governance in the UK to ensure that companies focus on balancing the needs of all their stakeholders, not just investors?
The UK’s corporate governance regime has been in place (with minor updates) for a long time now, but so much has changed over the last five years that I believe there is a strong case to reassess it and review. In the post-Brexit, post-Covid world, now also being reshaped by the cost of living crisis, it’s more important than ever that organisations take a balanced view and run themselves on a sustainable basis for the long term, rather than merely short-term results.
This is something that the best and most enlightened organisations already appreciate. They understand that if they take account of all their stakeholders’ needs and priorities (including investors, customers, employees, suppliers and partners) then they will be better run, more sustainable businesses that are more likely to succeed in the long term.
Unfortunately, though, we can’t assume that all businesses share that outlook. For some, the short-term imperative of meeting investors’ earnings expectations dominates at the expense of almost everything else. Customer service, for example, may be allowed to lapse in order to meet profitability goals.
Companies Act and Corporate Governance Code
That’s why I believe it may be necessary to revisit corporate governance and the relevant stipulations in the Companies Act to make sure that there is a clearer requirement for organisations to genuinely take account of the needs of all stakeholders and do their best to find an equitable balance.
Section 172 of the Companies Act 2006 states that an organisation’s primary responsibility is to its shareholders (‘members’). In the words of the Act, directors must “promote the success of the company for the benefit of its members as whole.”
The Corporate Governance Code does broaden this requirement by asking boards to show how they have considered the interests of stakeholders when performing their Section 172 duty. However, the code operates on a ‘comply or explain’ basis, meaning that compliance is not mandatory. Where a company doesn’t comply, it needs to explain why not and set out how it intends to do so in the future.
This is widely seen as a sound, principles-based approach. But my concern is that it may result in too much slippage, especially when conditions get tougher. The Financial Reporting Council (FRC), which is responsible for the code, has recently launched a consultation for views on whether any updates are needed, which I welcome.
We have already seen a worrying plunge in levels of customer service in the current challenging environment. Our UK Customer Service Index (UKCSI), published in July, showed the biggest annual fall we have recorded in 14 years of running the study, with customer satisfaction hitting its lowest level since 2015. Scores fell across every one of the 13 business sectors we track.
At the same time, there are continuing signs that some businesses are out of touch with the reality their customers are experiencing. We are still seeing inflation-busting pay rises for many executives, while some organisations appear to continue to pay out more in dividends to shareholders than a balanced approach would dictate.
Customers are becoming increasingly sceptical and distrusting. In research that we carried out amongst over 1,000 consumers for our recently published report on this topic of corporate governance, 37% said they had stopped using an organisation because of its reputation or business practices, while only 27% believed that UK organisations focus sufficiently on long-term success and performance. Three-quarters (76%) of customers said firms need to balance the interests of shareholders, employees and stakeholders – implying they don’t already. Nearly the same proportion (73%) would support a mandatory code of conduct.
Needless to say, there remain many examples of organisations who are committed to taking a balanced approach and who embrace the needs of customers as one of their guiding strategic principles. There are many boardrooms around the country where the customer agenda, as well as the perspectives of other key stakeholders such as staff and supply chain partners, are embedded into decision making.
However, there is always the danger of short-term investor needs becoming too dominant. In our corporate governance research, we surveyed 500 business managers – they were almost evenly split on whether UK companies have sufficient focus on long-term performance and success. Asked about their view on the statement “our leadership would like to do more for customers, but our owners, investors and shareholders are focused on increasing short-term profit”, 45% of managers agreed, while 35% disagreed, and 19% were not sure.
Time to review
Clearly, this is a complex area with a variety of views. Some would argue that any change to legislation would risk constraining innovation and growth; others would argue that there is a growing trend for investors to require companies to show how they are looking after the needs of customers and other stakeholders – thereby pushing businesses in a more balanced direction.
However, our research suggests there is a growing case, and a body of opinion, in favour of a change in company law. That’s why I believe the time is right for the government to review it, with the participation of all relevant stakeholders. We need to ensure that legislation, and the UK’s governance framework, supports a productive, sustainable, inclusive and fair economy that works – as far as it is humanly possible – in the interests of all.
To play our part in promoting healthy debate, the Institute will be hosting two CEO roundtables in September and November – do get in touch if you are interested in participating.