The collapse of UK construction giant Carillion is a timely reminder of the role that corporate governance has in ensuring a company’s longevity.
Spiralling debts forced Carillion into compulsory liquidation after three profit warnings in five months. Since then, serious governance concerns have been raised, including the company having paid an increasing dividend over a number of years, while presiding over a pension deficit in excess of £500 billion.
Corporate governance is an ever-evolving beast and the standards which companies are expected to adhere to are moving higher, for good reasons. Even without Carillion’s demise, this was always going to be a particularly hot topic this year, with a number of government-led efforts to catalyse change under way – spanning topics including executive pay, directors’ duties and board composition.
The pending revision of the UK Corporate Governance Code by the Financial Reporting Council (FRC) – which we will be contributing our thoughts to – is a relevant case in point. Mooted revisions include a hardening stance on what constitutes an independent director; ensuring appointments and succession planning at company-management level promote gender, social and ethnic diversity; increased scrutiny over executive remuneration and a greater promotion of a healthy corporate culture.
What’s more, previous exemptions for smaller companies are being removed, such as the requirement for a majority of independent board members. The FRC notes ‘even smaller companies should strive for the highest standards of corporate governance’.
Interestingly, we are seeing many of the same themes in the Monetary Authority of Singapore’s recent proposed revisions to its own code, with emphasis on a more streamlined set of guidelines, more thoughtful application from companies (rather than it being a box-ticking exercise) and tougher recommendations on board independence.
Will these reforms make a difference? We think so, but we caution against viewing them in isolation. They fit into a broader push, involving shareholders and asset managers like ourselves, to promote good governance and more long-term ‘holistic’ thinking. Indeed, this is what we mean when we talk about stewardship.