ELA response to House of Commons BIS Select Committee Inquiry on corporate governance

Date:
Wednesday, October 26, 2016
  • A number of recommendations by the Employment Lawyers Association were incorporated into the Government’s report on corporate governance, published 5 April 2017
  • Report encourages move away from boilerplate director reports to more meaningful and transparent approach
  • Modern Slavery Act to be used as a model for directors reporting to improve levels and standards of engagement with shareholders

The Employment Lawyers Association (ELA) has welcomed the Government’s report on corporate governance which has incorporated a number of ELA recommendations seeking to address the past failings and poor board-level accountability.

After severe corporate governance failings related to both BHS and Sports Direct, the Government wished to draw appropriate lessons from these failings and identify solutions. The reforms suggested in today’s report are designed to make directors take their duties more seriously and improve reporting structures to make them more specific and accurate.

Taking lessons from the Modern Slavery Act

The Government’s report has agreed with ELA that The Modern Slavery Act 2016 may provide a useful model in improving how directors engage with shareholders, moving away from boilerplate director reports that lack meaning but pass compliance tests.

The Modern Slavery Act was brought into force last year and requires companies turning over £36 million or more to state the steps they have introduced to make sure supply chains are slavery free. By mirroring this model ELA believes we could see directors making public statements that basic staff conditions have been observed for all workers, for example.

This could help stop situations arising like the ‘workhouse’ issues experienced by Sports Direct, which saw the retailer avoiding responsibility for staff subjected to distressing working conditions by using multiple long-term agency contracting agreements.

Commenting on the report, Jonathan Chamberlain of the Employment Lawyers Association, a non-political association representing some 6,000 employment lawyers, advising both employers and employees, said: “By introducing a requirement that companies must publish a ‘fair treatment of workers’ statement’, for example, could prove particularly powerful – especially when applied to listed companies, which must ensure statements to the market are accurate.

“Replacing the current boilerplate reporting requirements, which are largely tick box exercises, with something more considered and meaningful would be valuable.”

Make reporting requirements stricter

ELA gave both oral and written evidence to the committee and today’s report also acknowledged Jonathan Chamberlain’s contribution on section 172 and how it works in practice. The Government’s report agreed with Jonathan that section 172 duties, which concern a director’s duty to promote the success of the company and act in good faith, are challenging to evaluate and therefore it can be difficult to hold directors to account.

Jonathan added: “Today’s report should be welcomed – after BHS and Sports Direct, public confidence in big businesses and directors’ conduct dropped to an all-time low.

“It is particularly encouraging to see the Government taking on board a number of ELA’s recommendations. Taking lessons from the Modern Slavery Act, we would hopefully start to see increased transparency and digestible and accessible reporting. Likewise, stricter requirements in relation to section 172 would also be valuable and promote good corporate governance practices.”

ELA Working Party

Chair: Jonathan Chamberlain of Gowling WLG LLP
James Bickford Smith, Littleton Chambers
Jonathan Exten-Wright, DLA Piper (UK) LLP
Sarah Gadd, Latham and Watkins
Tim Leaver, Herbert Smith Freehills LLP
Karen Mortenson, Howard Kennedy LLP
Emma Naughton, Dentons UKMEA LLP
Christopher Tutton, Constantine Law Ltd
James Warren, Fieldfisher LLP
Audrey Williams, Fox Williams LLP
David Widdowson, Abbiss Cadres LLP
Christine Young, Herbert Smith Freehills LLP
Secretary: Serena Mohammed, Gowling WLG LLP

The legal content in this article is believed to be correct and true on this date.