Some stakeholders seem more equal than others

Some stakeholders seem more equal than others

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It is not often that august bodies representing company directors, workers, international investors and company secretaries agree on anything. Rarer still when they reach agreement on a topic as contentious as corporate governance. So the letter that the Institute of Directors, the Trades Union Congress, the International Corporate Governance Network and the Institute for Company Secretaries jointly wrote and delivered last week to Theresa May, the UK prime minister, is worth noting (see full text at the bottom of the article). The letter makes one particular request.

It asks that the government, which is in the process of reviewing corporate governance practices in the UK, finds a way to police legal obligations that everyone agrees are good ones, but which can be breached with impunity. The duties of the boards of directors who run British companies are well defined. They are to promote the success of the company for the benefit of all shareholders, and in so doing to have regard for the interests of workers, consumers and other stakeholders. That is what Section 172 of the Companies Act, the main piece of legislation governing company law, requires.

It would seem to many that directors of Sports Direct, the UK retailer accused of employment abuses, and BHS, the retailer that collapsed last year and jeopardised its pension fund in the process, breached some of those duties. But there was no one to hold them to account. There are of course many aspects of corporate governance. Remuneration and private companies were two on which the signatories commented. But this proposal simply asks that those who are protected by law can ask that the law be respected. Such a proposal is complementary to the role of investors in shareholder stewardship. Such stewardship is an important part of our governance system. If it is done well it will help prevent bad practice.

But it is not the job of any investor to police the law. And for small investors it is impossible. That is why the UK Shareholders Association, which represents small investors, told the parliamentary committee investigating corporate governance that “at the moment it appears that companies can ignore [the law] when it suits them, provided it does not upset the major institutional shareholders”.

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Study after study suggests that companies who pay attention to their stakeholders end up being more successful financially. Those companies that breach obligations hit the headlines, and bring the system into disrepute. It is no use telling those who have suffered that they shouldn’t worry because most businesses behave well. They need to have someone to complain to, who is free of conflicts and who can set things straight. This does not mean that people need to go to court.

In other fields, such as broadcasting standards, there is a simple mechanism where people can complain. No one goes to jail, but if a broadcaster knowingly and repeatedly breaches required standards, they cannot expect their licence to be renewed. It is in no one’s interest if, when our carefully crafted laws are breached, you cannot make a complaint and the abused can find no remedy.

It should have particular resonance for Mrs May, who, in her first speech as prime minister, told us that she would be on the side of working families, workers, consumers, stakeholders, and — through their pensions — investors in our capitalist system. She said her government would “do everything we can to give you more control over your lives. When we take the big calls, we’ll think not of the powerful, but you.” Here is an opportunity, with broad industry support, to do just that.