25 August 2018
The Financial Reporting Council has recently released a consultation document on Corporate Governance for large private companies. It contains thought-provoking advice that is just as relevant to small and medium-sized enterprises.
The most recent high-profile business failure (or rescue, depending on your point of view) is House of Fraser, a venerable organisation of more than 169 years, which has nevertheless fallen victim to modern retail trends. There have been a number of others in the last few months, including Maplins and Toys R Us – see my blog of 26 March. The media has widely reported the distress and disappointment of those affected: employees who fear losing their job, or of being re-employed on less favourable terms, customers, especially those who have paid on line for orders that will not be fulfilled, pension-scheme members and suppliers. There has been little mention of the shareholders. They are presumably unworthy of the public’s sympathy but they too are losers. This illustrates the way in which a business integrates into society, and the large number of people and organisations that depend on it or are influenced by it.
According to the Edelman Trust Barometer, an organisation that has been tracking trust in institutions for the past two decades, the percentage of the ‘informed public’ that had trust in businesses fell last year from 65% to 64%. Only 52% of the general public trusted businesses. In response to a notable decline in public trust in how big business operates, the Government published its Green Paper, Corporate Governance Reform, in 2016, which noted that strong corporate governance ‘provides confidence not just to shareholders, but to other key stakeholders, that a company is being well run”.
As a result of this consultation, publicly quoted companies now have to comply with the UK Corporate Governance Code. This took in only 0.2% of the UK’s registered companies, so recently the Government tasked the Financial Reporting Council, under the leadership of James Wates CBE, with a consultation on how this good practice could be extended to large private companies – those with more than 2,000 employees, a turnover of £200 million or a balance sheet of more than £2 billion. This measure, if implemented, will still leave approximately 96% of British companies outside the scope of compulsory compliance with the Code.
Probably most owners and managers of SMEs will breathe a sigh of relief that they will not have to comply with what they might see as yet more red tape.
On the other hand, is it possible that some will see that the adoption of a corporate governance code could strengthen their business and enhance its relationship with its investors, managers, employees, customers and suppliers?
The failure of a business is a catastrophic event that causes financial hardship and psychological stress. Its effects are often far-reaching, usually affecting the wider community. Successful companies avoid this by adopting good corporate governance, ensuring that they are sustainable, and in doing so become foundation stones of the community, generating wealth, creating employment and setting good examples.
Corporate governance should not be a bureaucratic burden, or a box-ticking exercise, but instead it should be a way of stepping back from the drudgery of day to day management and taking time to examine your company’s core values, basic strategy and future prosperity.