Corporate Governance Code: “the mountain in labour has brought forth a mouse”

Parturient montes, nascetur ridiculus mus[1]

It’s bit harsh to describe the Financial Reporting Council’s new Corporate Governance Code as a “ridiculous” mouse, but after the hopes raised by Mrs May on the steps of Downing Street two years ago for real reform to corporate governance and the effort expended in consultation since, this reform is timid, diminutive and disappointing.

It is hardly surprising. The Prime Minister’s original challenge to the corporate world was muddled.  She faced plenty of reasoned opposition to specific ideas she floated.  The scandals that probably spurred her to fly the kite for reform have faded with the passage of time.  Brexit has diverted attention from almost everything else.

Nonetheless, the new code includes some steps forward. There is a some modest recognition of the wider duties of the company beyond those of the shareholders in the new Principle A:

“A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”

There is a further new provision which requires that a board should:

“…..understand the views of the company’s other stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.”

The reminder to boards of their duties under Section 172 is welcome, but the new code falls well short of the proposals described on this site for the creation of a commissioner with power to refer companies to the Secretary of State, on application from stakeholders who could demonstrate that companies had failed to engage with Section 172. The provision in the 2018 Code has a declaratory value and will focus the attention of company secretaries and communications teams on crafting suitable words, but it lacks the backup of teeth or sanction.

The 2018 Code contains some new provisions for remunerations committees, but they are weak and do little to address the problems of runaway executive pay. Encouragement of “review of workforce remuneration and related policies and the alignment of incentives and rewards with culture” and the requirement that chairs of remuneration of committees should first have served for at least 12 months on a remuneration committee is unlikely to make one iota of difference to outcomes. These are unlikely to shift the behaviour of remuneration committees, which requires changes to the accountability of directors (as addressed elsewhere in the Escondido Framework) and a more courageous and challenging approach by the members of remuneration committees to the settlements that they are expected to endorse.

The 2018 Code pays lip service to the Prime Minister’s support in 2016 for the 1970s panacea of worker representation on boards:

“The board should keep engagement mechanisms under review so that they remain effective. For engagement with the workforce, one or a combination of the following methods should be used:

  • a director appointed from the workforce;
  • a formal workforce advisory panel;
  • a designated non-executive director.


“If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.”

We have explained the drawbacks of these approaches elsewhere: conflicts of interest, undermining of the unitary board, challenge of adequately representing the diversity of workforce, and – core to the model of the firm described the Escondido Framework – a failure to understand the relationship of the firm to all its “stakeholder” groups.

However, if any company is looking for “alternative arrangements” that address the criticisms set out above of the Code’s approach to workforce engagement, we commend the approach described in our letter to the Financial Times on 3 November 2017 and response the Green Paper on Corporate Governance.

[1] “the mountain in labour has brought forth a ridiculous mouse” Horace: Ars Poetica, 136–9