Investor engagement

The new governance revolution

Industry 4.0, or the fourth industrial revolution if you prefer, is an amalgamation of cyber-physical systems, the Internet of Things and the Internet of Systems. It has come upon us with both gentle stealth and incredible speed and heralds a new age of both risk and opportunity for business and society.

But those responsible for corporate governance will need to meet new challenges in this 21st century way of doing things. In truth, it’s not just sometimes difficult to grasp the concept of Industry 4.0 that hovers ‘menacingly’ over our 25-year-old Corporate Governance Code – it forms a trinity with increased levels of public mistrust in business and growing societal inequality. Together they have spurred both the Government and the FRC to act.

The first, and potentially the most significant, reform will compel listed companies to publish the ratio of the chief executive’s pay to that of the average employee, and justify it. This is bound to increase stakeholder and press scrutiny and companies will need to put measures in place to withstand it. And if the ratio increases year on year, or is significantly higher than that of others in the same sector, reputational damage may be the consequence.

Mandatory employee representation at the decision‑ making level will alter plc boardrooms. Businesses will have a choice of which of three variants of this reform to implement: appointing a non-executive director to represent employees; creating a workers’ advisory council; or nominating an employee representative as a director. But there are fears about implementation. The first option, seen by some as the most likely, offers little opportunity for a fairer system of governance and may simply create ‘more of the same’ rather than be recognised as a bold new step. The latest reforms also state that where at least 20% of shareholders vote against executive pay packages, this will be recorded on a public register, held by the Investment Association.

In our view, this appears more significant in theory than it is likely to be in practice. Where shareholders oppose an executive pay package en masse, it is quite clear that a company needs a fundamental rethink. So this measure seems likely to do little more for corporate governance than formalise actions already naturally under way. We can anticipate the introduction of the regulation of private companies. Alongside the new corporate governance paper, the FRC is undertaking a fundamental review of ‘The Code’. The reformed FRC regulations are comparable to the current system, in that they will be on a ‘comply or explain’ basis. The scope remains to be confirmed but it is expected the new Code will focus more on principles and value creation.


1 Purpose and culture

To meet the challenges ahead, companies must define why they exist. As well as refining their purpose, companies must establish and measure culture; set the right tone at the top; develop a mission that incorporates organisational values; set the broad framework for managing performance; and communicate it effectively throughout the organisation.

2 Long-term thinking

Boards need to focus on long-term trends and take a total view of the market and its connection to other social drivers. An example would be the growing financial inequality which is causing unrest around the world, not just at home.

3 The board of the future

Boards must embrace diversity in its widest possible sense and evidence this in their reporting, through succession planning. They also need sufficient digital competence on hand to capitalise on the opportunities Industry 4.0 presents.

4 The voice of the stakeholder

Directors must be clearer about meeting their duties under section 172 of the Companies Act 2006. This should involve stakeholder representation, with employees having a pre-eminent position among those stakeholders. The FRC must ensure there is a clear framework for employee views to be accurately represented. Good boards will go beyond merely engaging with stakeholders and define how they will alter business strategy in response to any challenges. The Luminous view From a communications perspective, we see all too often that the current Code ‘leads’ reporters to produce boilerplate governance text, replete with irrelevant and, in the most challenging examples, dead information. To combat this and to make a real difference, changes to the code will need to be radical and forward- thinking. Governance must provide real insight into corporate culture, evidence long-term thinking and acknowledge the impact on wider stakeholders.

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