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Green paper on corporate governance reforms falls short

The government's green paper on corporate governance focuses on three areas for parliamentary debate: executive pay, strengthening the employee and wider stakeholder voice and extending current corporate governance regulations to large private businesses.
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Whilst the green paper on corporate governance is an honest attempt to deal with pertinent issues, business leaders must cooperate with the government to improve the proposed reform in areas it falls short. Here are the three topics up for debate:

Executive pay

In a free marketplace there are always those who will earn considerably more because of their unique and valuable skills – it is unthinkable that a government body could directly standardise executive pay.

An alternative way of dealing with the matter might be the tightening of “director accountability” in terms of the impact that their decisions have on the running of the company by linking executive reward to long-term company performance instead of reactive year-by-year performance reviews followed by immediate reward.

Strengthening the employee and wider stakeholder voice

The green paper on corporate governance suggests including workers and stakeholders onto company boards is the solution to abuses such as those seen at BHS and Sports Direct. But this would be a simplistic solution. Even if a sensible mechanism is developed to put an ordinary worker in the boardroom, and a good candidate who can add real value is selected, what next? The worker will discover that, like all board members, they must act in the best interest of the company and not simply be a worker representative, making the whole exercise meaningless.

The existing UK Corporate Governance Code already has significant guidelines on stakeholder issues in terms of engagement and involvement in a number of ways. Therefore what is missing here is not more company-wide rules – instead the UK needs tougher legislation that will specifically police rogue CEOs who abuse their positions.

Extending corporate governance regulations to large private businesses

In the UK many organisations already follow the Corporate Governance Code as it makes business sense to do so – as such, this is likely to be the least controversial proposal.

Currently the system generally operates on a “Comply or Explain” basis. A company (public or private) needs to comply with a certain guidelines and if they cannot or will not, all they need do to explain why the guidelines have not been followed. The “Comply or Explain” principle might be seen by some as not rigorous enough or indeed a get out of jail card for firms. However, the government must understand that the business community values this concept as it recognises the fact that you cannot have one-size-fits-all corporate governance guidelines in all locations, all the time.

Mufid Sukkar is group chief strategy officer at Nest Investments

Image: Shutterstock

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