Corporate governance is about culture and the solutions shouldn’t be overly prescriptive, warns ACCA

The UK government would be well-advised to address the corporate governance issues raised in this week’s report from the Business Energy and Industrial Strategy (BEIS) Select Committee, but must avoid overly prescriptive compliance-driven measures to tackle corporate culture, according to the Association of Chartered Certified Accountants (ACCA).

In the report published this week, MPs called for the Government to ban companies from awarding lucrative and complex share-based pay schemes to top executives, with claims they create “perverse” incentives and encourage short-term decisions.

The report by the Commons Business Select Committee said long-term incentive plans (LTIPs) should be outlawed from next year as part of an ongoing overhaul of corporate governance rules.

The cross-party group of MPs urged companies to replace LTIPs with simpler deferred stock options. Senior executives would be awarded shares that they would only be able to cash in years later, including after they have left their jobs.

“The enforcement of superficial targets is no substitute for a principles-based approach to corporate culture which tackles issues at the root cause,” said Jo Iwasaki, head of corporate governance at ACCA.

Responding to the recommendations, Jo Iwasaki, head of corporate governance at ACCA. said: “The Select Committee’s report is useful in identifying ways that we can improve current guidance on corporate governance, but to resolve issues in the most effective way we need to look at bottom-up solutions that obtain the engagement and buy-in of employees, not just company boards.”

Ms Iwasaki continued: “The framework model adopted by the Financial Reporting Council (FRC) has been largely successful so far in driving best practice, considering that this is a long-term exercise.

“If we pile more compliance measures on companies, whether listed or private, we run the risk of seeing corporate governance reduced to a superficial tick-box exercise.

“This will not achieve cultural reform in the same way that a committed effort driven by the board and executives, guided by an effective framework will.”

The committee’s call for businesses to simplify the structure of executive pay and put an end to long-term incentive plans was, however, cautiously welcomed by Ms Iwasaki.

She said: “Remuneration should be linked to long-term, sustainable company performance.

“The disclosure of pay ratios between CEO and senior executives and all other employees could be a positive initiative, provided it is accompanied by relevant narratives to ensure transparency and good conduct, such as the basis of the calculation, the benchmark the company considers to be reasonable, and the actions that have been or will be taken to achieve it.

“This should help communicate the company’s vision for sustainable success, as well as its culture of accountability, to internal and external stakeholders.”

The MPs’ new report further recommended companies establish stakeholder advisory panels, including workers, consumers, and suppliers.

It also suggested workers be represented on remuneration committees and for the chairs of those committees to be expected to resign if fewer than 75 per cent of shareholders fail to approve the company’s pay policy. But it stopped short of demanding a worker representatives on boards – something proposed and then watered down by Theresa May last year.

Ms Iwasaki said: “ACCA advised in our submission that stakeholder advisory panels could be beneficial for companies as they could ensure a broad range of stakeholder views and could optimise opportunities and identify risks more effectively.

“I agree with the Committee recommendation that the corporate governance code be revised to require a section in annual reports detailing how companies are conducting engagement with stakeholders.’

“However, creating a stakeholder advisory panel should not be seen as a substitute for good governance – that responsibility must always rest with the board.”

The new report also saw MPs say that business must act on pay and diversity to address a “worrying lack of trust” among the public.

On the issue of diversity in UK boardrooms, Ms Iwasaki added: “It is broadly acknowledged that a diverse board enables better, more constructive discussions which lead to better decision making.

“I welcome the acknowledgement in today’s report that diversity should be viewed in its broadest sense, with intellectual diversity and experience being considered as important as ethnicity and gender.

“However, regulatory tools can be blunt instruments when it comes to enforcing diversity on boards. Providing additional guidance on the benefits of diversity, and requiring companies to disclose information on diversity in their annual reports, is therefore welcome.

“I do not think the Committee’s proposal to impose a quota on the FTSE 350 would necessarily change the culture issues that are the root cause of low levels of diversity, both at the top and in the pipeline. To increase overall diversity, companies need to understand the benefits of a diverse workforce and encourage it at all levels.”