Tuesday, 24 September 2013

Time to put corporate governance somewhere else?

I've been blogging quite a bit about corporate governance reform lately, particularly employee representation. One of the things that I've been thinking about is how odd it is that the UK Corporate Governance Code sits under a body that is primarily focused on audit and accounting issues - the Financial Reporting Council (FRC).

This isn't to say that these issues aren't important - they clearly are, and investors are paying more attention to them than in the past, in my opinion. What's more the FRC's own role is subject to more scrutiny than I can remember previously. I think this reflects a few concerns - the debate about IFRS and True & Fair, the perception that the FRC is too close to the accounting industry, and the fact that auditors seem to have got away with not spotting that the banks were about to fall over.

However, the thing that strike me is that something as important as the way that companies are owned and managed simply isn't an accounting/auditing/financial reporting issue at all. For historical reasons the Code sits under the FRC, but I question how appropriate this is. It's particularly problematic given that the governance of the FRC itself is skewed towards financial reporting. It consists of directors, asset managers, accountants etc. Yet in the governance of companies I would argue that the three main groups that need representation are management, labour and investors. So where are the employee representatives?

I know that the FRC used to have a TU rep on it (it was Ed Sweeney from Amicus for a while when I was at the TUC), but it no longer does, and, to be honest, I would query the value of putting someone back on the organisation as it stands. This is because the large bulk of the work that the FRC does relates - as its name tells us - to financial reporting issues. A lot of this a lot of the time won't be stuff where employee representatives would have a view. Yet it is bizarre that because employee representatives may not have much to say about financial reporting they are excluded from the governance of a body which has responsibility for the far bigger issue of corporate governance.  

Therefore perhaps the UK Corporate Governance Code should either be put somewhere else or a committee purely focused on the Code should be created on which labour is represented alongside management and shareholders - and no-one else. Accountants, corporate lawyers etc could still provide evidence to such a committee, but since they are not one of the core groups involved in the governance of companies, I don't see that they have any right to representation. This would reverse the bizarre situation we have now where the accountancy industry has representation, but those that work in the companies the Code applies to - and have a very significant stake in them - do not.

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