The failings of BHS and Sports Direct should serve as a “wake-up call” and remind businesses that they have responsibilities to all stakeholders, not just shareholders, experts said this week.
The business, energy and industrial strategy (BEIS) committee held an evidence session on corporate governance on Tuesday.
“One of the issues is the hierarchy – the interest of stakeholders are there but they are secondary to shareholders,” said Janet Williamson, senior policy officer at trades union group the TUC, giving evidence.
“We would recommend a change whereby the primary aim would be promoting company long-term value, followed by those of shareholders.”
Stephen Haddrill, chief executive of the Financial Reporting Council, agreed, pointing out that there is very little awareness of section 172 of the Companies Act 2006 – which refers to directors’ duty to promote the success of the company – in the private sector and at the lower end of listed companies.
“There is an absence of prosecutions,” he said. “Enforcement of the law is required for there to be recognition of it but there isn’t really an enforcement mechanism.
“Under the corporate reporting regulations, we have the power to scrutinise and seek changes to the financial statements and to the strategic report but much of what is said is in other parts, such as remuneration.
“We have no powers to scrutinise other parts of the annual report, which I think is ridiculous and needs to change.”
Oliver Parry, head of corporate governance at the Institute of Directors, said there should be guidance for larger unlisted companies but the challenge is which regulatory body would have the capacity to check it.
“The best solution at the moment is checking a sample of around 10%,” he said. “The problem is the capacity and resource.”
Williamson agreed there should be regulatory oversight of private companies, particularly relating to directors’ duties.
“Owning a company should not be the same as owning a pen or piece of paper,” she said. “If you asset strip a company, you are ruining the lives of thousands of workers and communities.”
Haddrill said the regulatory gap is around issues of integrity and ethics, and argued that would be good territory for a governance code to be developed for private companies.
Iain Wright, BEIS chairman, added: “We’re looking at this through this issue through the prism of BHS, where we had a domineering individual who owned the business and a weak board. How can we avoid that happening again?”
But Haddrill said the Financial Reporting Council struggles to take action against directors, other than accountants.
“We’ve taken successfully a number of cases in the last few years against accountants because that is what we are empowered to do – they’re usually about an accountant not living up to the ethical requirements of the profession,” he said.
“We find ourselves in the ridiculous position where we can hold an accountant to account but, if another member of the board is equally culpable, we can’t touch them.
“We need to recognise the role of the director as a professional role and then find an enforcement mechanism to hold them to account.”