Corporate Governance and Social Responsibility Debate

Corporate Governance and Social Responsibility Debate

Corporate Governance and Social Responsibility Debate

The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Margot James)

I congratulate the hon. Member for Sheffield, Heeley (Louise Haigh) on securing today’s debate on corporate governance and social responsibility. I know it is an area in which she has a long-standing interest and considerable expertise born of her previous career—she and I share a business background. However, I listened carefully to what she said, and I do not fully recognise the picture of corporate life she has painted, although, certainly, some of it had strong resonance.

We require no reminder of just how important it is that business is conducted in a socially responsible way. There are over 3 million businesses in the UK, from small start-ups to large established businesses with a presence across the globe. They provide employment for over 26 million people. Whether large or small, they are a critical part of our society. They are not in some way separate from it. The way businesses operate and the decisions they take have a big impact on their employees, customers and suppliers and on the communities in which they are based.

The Government have a key role in setting minimum legal standards that businesses must meet in areas such as employment and consumer protection, environmental standards, and the protection of creditors in the event of insolvency. These provide a vital underpinning for business activity; it is the corporate and legal responsibility of business to comply with that framework, and I believe the vast majority do. Where businesses fall short, they are rightly held to account.

However, corporate responsibility and the way businesses manage their impact on society go beyond simple legal compliance. If we are to achieve our objective of an economy that works for everyone, we need more businesses to aim at the high standards of responsible business practice achieved by our best companies. The Government’s role in that context is to encourage those businesses that lead in good practice and to encourage others to follow suit.

The hon. Lady mentioned diversity in senior business management and at board level. We are encouraging business-led moves towards a more diverse and inclusive culture in the top management of our biggest companies that will set a lead for others to follow. Boardrooms should mirror wider society, and businesses should make the most of all the talent they have in their diverse workforces. We are following up the success in increasing representation of women on boards of our biggest companies by working with businesses to ensure that ​more talented women achieve senior executive roles. We welcomed the report last month from Sir Philip Hampton and Dame Helen Alexander, who are now pressing ahead with proposals to drive up the representation of women at senior executive level and build on the pipeline for female management and talent.

We also welcomed last month the launch of the report by Sir John Parker and his recommendations for addressing the worryingly low level of representation of black and minority ethnic directors in UK boardrooms. Half the FTSE 100 companies do not have ethnic minority representation on their board, and that is shameful. Diversity at the top of our businesses is about trust. It shows workforces that their boards are representative of them and that routes to the top are open to them. People want to believe that if they work hard they too can get there, whatever their background.

As the hon. Lady reminded the House, the Government have recently published a Green Paper on corporate governance reform in which we are exploring options for strengthening aspects of our corporate governance framework. The UK has a good reputation for corporate governance that combines high standards with low burdens, but this reputation can be maintained only if Government and business review and upgrade those standards from time to time. She mentioned several recent reports on corporate governance, which followed landmark reports by Cadbury, Greenbury and Hampel in the 1990s.

The Green Paper invites views on three main areas. First, it asks for views on options to strengthen shareholder influence on executive pay, to improve the transparency of reporting on executive pay, and to strengthen the link between executive pay and long- term company performance. The hon. Lady was right to point out that the gap between rising CEO pay and corporate performance had grown too wide in recent years.

Secondly, the Green Paper asks for views on options for strengthening the connection between the boards of directors of companies and their employees, customers, and other stakeholders. All the best companies know that there are economic as well as societal benefits to be derived from maintaining strong links with interested groups. However, we need to consider what more can be done to ensure that all UK companies are equipped with an appropriate model of employee, customer, and wider engagement.

Finally, the Green Paper seeks views on whether some of the features of the corporate governance and reporting framework covering quoted companies should be extended to our largest privately held companies. Many of these companies have an economic footprint that is equal to that of listed companies. For example, there are approximately 2,500 private companies with more than 1,000 employees. In asking these questions, we want to improve the ability of UK businesses to take decisions that are informed by a wider range of views and better support long-term company performance and sustainability.

Louise Haigh

I absolutely support proposals to extend reporting to private companies, but will the Minister comment on how effective the current reporting regime is? Some businesses certainly report at an absolutely ​excellent level. However, I used to have the arduous and unenviable task of reading through some of these reports, and for many companies it is just a tick-box exercise. The FRC is not sufficiently resourced in terms of staff or sanctions properly to enforce the regime on companies that refuse to report properly and raise their standards, as she rightly said, to those of the businesses that are doing well in this area.

Margot James

I agree that the standard of reporting on the non-financial aspects of corporate performance is mixed and varied. One of the purposes of our Green Paper is to bring the standards of the poorer companies in terms of reporting, and indeed within other parameters, up to the standards of the best.

One option is for companies to appoint individuals to company boards to represent these stakeholder views. In the case of employees, this could be someone who works for the company—a worker representative. There is nothing in UK law to prevent unitary boards from including worker representatives as full members. Indeed, such arrangements can work well for some companies, FirstGroup plc being the best-known example. But very few UK companies have adopted it. There are undoubtedly more companies who could benefit from this approach, and the consultation period provides an opportunity for the case to be made.

Given the huge variety of UK companies, it is unrealistic to think that one size will fit all corporate requirements. For other companies a different approach to workforce engagement will work better. That is why the Green Paper makes it clear that we are not proposing to mandate the direct appointment of employees to company boards. Instead the Green Paper looks to generate a debate on the range of options that companies can choose to improve the connection between boardroom and workforce. The best companies know that there are economic benefits to be gained from understanding and maintaining healthy relationships with employees and customers. The key point is to ensure that all companies are equipped with an appropriate model of engagement to deliver a stronger voice for employees and other stakeholders in the boardroom.

The hon. Lady mentioned section 172 of the Companies Act 2006. We are not consulting on amending the wording in that section, but we are consulting on whether, and if so how, companies could provide more information on the steps that directors are taking to fulfil their duties under that section. We are also consulting on how to strengthen the connection between boardrooms and other voices, as I mentioned earlier. We would welcome comment—the hon. Lady’s views will be considered, along with those of other interested parties—on how we could get companies to report more fully on how directors are fulfilling their duties under that section.

I am very grateful to the hon. Lady for initiating this debate, which has drawn attention to the key contribution that businesses can and should make to society. It has also provided an opportunity to set out steps that the Government are taking to raise standards in responsible business practice.