1Introduction
Origins
1.Our summer 2016 inquiries into the demise of BHS and employment practices at Sports Direct exposed what we judged to be serious failings in corporate governance at two major businesses.1 Both these examples served to undermine trust in British business and to shine a light on issues of governance and fairness. In both cases, decisions taken in boardrooms appeared to neglect the interests of those, many on low incomes, who worked hard to generate profits for the owners. In addition, there has been growing dissatisfaction in many quarters with high levels of executive pay, with a widespread perception that these have not reflected company performance, nor been fair in comparison to increases for other employees.
2.Corporate governance is there to support effective decision making by companies for their own long-term success. It provides a framework of law, rules and practices by which company boards balance the interests of shareholders with other stakeholders, including employees, customers, suppliers, creditors, pensioners and the local community. In the two recent cases we considered, something went badly wrong. We undertook then to conduct an inquiry to see whether there were any systemic problems that need addressing in the way corporate governance operates.
3.Since our Reports of July 2016, a new Prime Minster has taken office, who spoke in her brief election campaign of a “need to get tough on irresponsible behaviour in big business.”2 The Prime Minister has since described the scrutiny provided by those responsible for holding big business to account as “not good enough” and she subsequently spoke of the damage to the social contract between business and society caused when “a small minority of business and business figures appear to game the system and work to a different set of rules”.3 The Government subsequently published its Green Paper on Corporate Governance in November 2016, focussing on three aspects: executive pay, private companies, and workers on boards.4
4.Our own inquiry has considered these issues, along with broader aspects of corporate governance, such as the existing legal and regulatory framework under the Companies Act 2006 and diversity on boards. This Report is complementary to our Report on industrial strategy, published in March 2017, which reviewed the Government’s own Green Paper on Industrial Strategy and proposed a new framework for informing long-term decision making for businesses and government.5 It also links to our current inquiry into the Future World of Work, which is considering whether current employment law is adapting fast enough in the face of new employment models and the rise of the “gig economy”. In this Report we examine whether our corporate governance framework is still fit for purpose: whether it provides the right structures to assist businesses in making high quality decisions for the long term, taking fully into account the wider interests of society, and how good behaviour can be embedded in business through cultural change and persuasion.
Our inquiry
5.We published terms of reference on 16 September 20166 and subsequently took oral evidence from a cross section of over 170 organisations and individuals who submitted written evidence.7 In addition, we held discussions with: a range of chairmen and chief executives of major companies at the Confederation of British Industry (CBI); Professor John Kay, Visiting Professor of Economics at the London School of Economics, and others; and with a range of businesses and trade unions during a visit to Sweden. We are extremely grateful to all those who contributed to our inquiry. We also place on record our thanks to our specialist advisor on this inquiry, Paul Coombes, of the London Business School and to the Institute of Chartered Accountants for England and Wales (ICAEW) for their assistance in analysing the written evidence submitted.
1 BHS, First Report of the Work and Pensions Committee and Fourth Report of the Business, Innovation and Skills Committee, Session 2016–17, HC54; Business, Innovation and Skills Committee, Third Report of Session 2016–17, Employment practices at Sports Direct, HC219.
4 Department for Business, Energy and Industrial Strategy, Corporate Governance Reform Green Paper 29 November 2016
5 Business, Energy and Industrial Strategy Committee, Industrial Strategy: First Review, Second Report of Session 2016–17, HC 616
7 See List of witnesses at Annex 1
4 April 2017