As highlighted by the authors of the document (Jeroen Veldman, Filip Gregor and Paige Morrow), the inquiry reflects a growing consensus across the political spectrum and within the business community that the current corporate governance framework fails to support long-term sustainability, both in terms of financial performance and broader environmental and social objectives. The report and our submission synthesise leading academic and practitioner-driven research on potential solutions.
Below you will find the executive summary of our joint submission. The full submission is accessible on the Purpose of the Corporation Website.
Between 2014 and 2016 Frank Bold, a purpose driven law firm, together with the Modern Corporation Project at Cass Business School hosted a global series of roundtables on corporate governance. This submission presents relevant conclusions of this process.
Mainstream corporate governance models have been narrowing since the 1970s in order to put the maximisation of shareholder value at the centre of corporate attention. The resultant focus on short-term share price rises leads to short-termism, undermines companies’ ability to invest in their future and diminishes their capacity to anticipate and mitigate systemic risks. To address this situation, we recommend that the Committee consider the following issues.
1. Company law could clarify, for example by revising s. 172 of the Companies Act, that the duty of directors is:
- a. Owed to the corporation as a whole;
- b. To protect the long-term development of the corporation;
- c. To avoid contributing to systemic and specific risks that cause negative impacts on corporate stakeholders and society at large; and
- d. To specify how stakeholders’ interests will be taken into account.
2. Company directors should disclose how they evaluate systemic risks, how they take into account stakeholders’ interests, and how they reflect both in the company’s strategy.
3. The concept of integrated reporting can provide guidance for companies as to how they should take into account and balance interests of different types of shareholders and of other stakeholders.
4. The Parliament can establish an authority with powers to intervene where corporate governance and decision- making contravenes the law (see the example of ASIC in Australia). Such an institution can also have a mandate to oversee board members’ adherence to requirements and provide induction and training to directors.
5. Investors can be required to provide fuller and more timely information about their ownership of derivatives, short positions and about their voting and share lending policies.
6. In order to support an overall focus on long-term sustainable value creation, the incentive structures for executives should be:
- a. Based on metrics associated with a firm-specific long-term value creation strategy that integrates nancial and non-financial objectives, rather than share price.
- b. Conditional on the achievement and sustainment of long-term goals, including long-term economic performance, fraud prevention and detection, ESG objectives, R&D investment and employee satisfaction.
- c. Transparent regarding the metrics used and the ratio of executive pay to minimum and median salary in the firm.
- d. Limited by reference to average, median or minimum salary within the company.
- e. Limited in terms of bonuses in relation to fixed pay (as the EU’s Capital Requirements Directive has done for banks)
7. There are a number of positive effects of increased board diversity, however this strategy will not on its own address the problem of short-termism.
8. Employees and other stakeholders can be engaged in corporate governance in multiple ways:
- a. There is no major legal or economic argument against employee representation on boards as long as the mandate of directors is embedded within the framework of directors’ overall responsibility to the company. Indeed, there are strong economic arguments in favour of this change.
- b. Company law can give employees or other stakeholders a right, like shareholders, to bring a statutory derivative action on behalf of the company.
- c. Allowing employees to express a view on the remuneration scheme of top executives can lead to narrowing the gap between top executive pay and median pay in the corporation and to a be er alignment of executive compensation schemes with the long-term success of the corporation.
- d. Employees can also be given broader information and consultation rights in bankruptcy or M&A situations.