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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Insolvency

After several high profile business failures – Is corporate governance robust enough?

corporate governance failuresand  penalties Research by a provider of audit, tax and consulting services has found that only 21% of board members think corporate governance is critical for a business to achieve success.
The findings by RSM also revealed that 96 per cent of company Board members it surveyed expected to see an increase in the number of criminal prosecutions of those senior executives and organisations implicated for poor risk management.
The issue of corporate governance has been under review by the FRC (Financial Reporting Council) for some time following high-profile collapses of businesses like BHS, Patisserie Valerie, Carillion and most recently Thomas Cook.
In its most recent annual report, the FRC found that that “audit quality is still not consistently reaching the necessary high standards expected”.
More than a year ago, a review of the FRC itself led by Sir John Kingman proposed the establishment of a new regulator, the Audit, Reporting and Governance Authority, but this was not acted upon by the Government before business was suspended pending the outcome of the forthcoming general election.
Concerns about corporate governance have also been raised by a Government committee, the business, energy and industrial strategy select committee which has called on ministers to move faster to reform the audit profession, strengthen corporate governance and curb executive pay.
Among its findings were that “too often, audit teams appear prepared to accept what management tells them rather than questioning its plausibility and drawing on specialists to form their own view”.
Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is meant to take account of the interests of not only the business but its shareholders and stakeholders.
In July 2018, the FRC revised its corporate governance code, which was to apply to the accounting periods beginning on or after 1 January 2019.
According to the FRC the new code was designed to focus “on the application of the Principles [Code] and reporting on outcomes achieved. For the Code’s Provisions, companies should disclose how they have complied with these or provide an explanation appropriate to their individual circumstances.”
Clearly, more robust measures are going to be needed if the RSM research findings are any indication of the attitudes of business directors to the idea of responsible corporate governance.
Interestingly the IoD (Institute of Directors) yesterday launched what it called its manifesto for the next government to restore trust in corporate Britain. It included a proposal for a new Public Service Corporation to restore trust in the outsourcing sector, reforms to the regulation of auditors and replacing the FRC with a new, stronger Audit, Reporting and Governance Authority.
Changing corporate behaviour is a challenge, especially when it is so entrenched, but there is nothing like the threat of criminal proceedings to focus a board of directors given that in law they are collectively responsible for the decisions, behaviour and actions of any one director. The role of non-execs is key.

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Banks, Lenders & Investors Business Development & Marketing General

The new Corporate Governance Code offers lessons for SMEs

Corporate Governance Code should include worker consultationThe mission of the FRC (Financial Reporting Council) is stated as being “to promote transparency and integrity in business”, a message that we should all reinforce.
This, it claims, is at the heart of the revisions to its Corporate Governance Code published last month.
One of the main changes to the Code is a requirement for boards to understand and address the issues of all stakeholders, not just shareholders, and to consider the longer-term impact of their decisions.
This includes consultation on board appointments, not just with shareholders but also involvement of the workforce, where they recommend that either a director be appointed from the workforce, a workforce advisory panel be set up, or at least a non-executive director be designated to represent the workers.
It also recommends that there should be a mechanism for the workforce to raise concerns in confidence or anonymously with arrangements for “proportionate and independent” investigation where necessary. This, I believe, can best be covered by having a whistleblower policy which ought by now to be a standard policy in all staff handbooks.
The newly-published Code, which is effective from January 2019, has been broadly welcomed by the IoD (Institute of Directors) and the CBI (Confederation of British Industry) particularly the greater emphasis on the longer-term impact of decisions and on the importance of the workforce as stakeholders.
The TUC’s General Secretary, Frances O’Grady, however cautioned: “While it’s good this new code recognises the importance of workforce engagement, the real test is whether companies give workers more of a say in how they are run” regretting that the requirements were not made compulsory.

What can SMEs learn from the new Corporate Governance Code?

The Corporate Governance Code applies only to Premium Listed businesses, which is defined by the London Stock Exchange as those businesses meeting “the UK’s highest standards of regulation and corporate governance”. It adds that this status enables them to enjoy a lower cost of capital.
Nevertheless, the principles enshrined by the new Code are worthwhile for all businesses including SMEs to consider and incorporate into their culture.
Firstly, it should be obvious that clients and customers are more likely to use and remain loyal to a business that is clearly trustworthy and ethical and therefore business reputation is key to survival and growth.
Secondly, I have commented frequently that the way a business treats its employees can be crucial to its success or failure.
Too often, however, they are not seen as stakeholders with an interest in the business’ survival and who with their hands-on knowledge can help it to make improvements to systems and processes and therefore to productivity and profits.
As mentioned in my recent blog on why whistleblowers can be a force for good, employees are often in a position to identify malpractice and wrongdoing although this requires getting the culture right as all too often they are reluctant to speak out for fear of the consequences for their jobs.
Employee motivation is something that can also make a huge difference to a business’ success. If they feel that they are respected and their input is valuable they are more likely to engage by making recommendations for improvement and also to stay with the company. This can be crucial at a time when there is, as now, a significant skills shortage at all levels of business.
Finally, longer-term thinking in business has been in short supply in the aftermath of both the 2008 Financial Crisis and particularly since the decision on Brexit. This has had a negative effect on investment and so the focus on the longer term in the Code is surely to be welcomed.
Codes of Corporate Governance, therefore, have relevance not only for Premium Listed companies but for all businesses. They are, after all, about integrity and sustainability.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Are CEOs worth their pay?

man contemplating moneyRising inequality and increasingly insecure employment in the 21stCentury has focused attention on what has come to be seen as a disproportionate level of CEO pay in many companies.
Recently the world’s largest fund manager, BlackRock, added its voice to the debate warning the chairs of the UK’s biggest companies to stop making large payments to CEOs when they leave and in lieu of pensions and said it would only approve directors’ pay increases if employee wages were also increased.
The question focuses attention on how CEO remuneration is assessed, by whom and over how long a period should their performance be measured.
It is no longer deemed good enough to justify CEO rewards by the need to pay competitively against their peers in order to retain them. Short-term thinking in providing high returns to investors and shareholders as a measure of a CEO’s effectiveness has also come under increasing scrutiny as such returns may not be in the best interests of a company’s longevity.

What skills does a good CEO need?

The effective CEO must be able to think strategically in the short, medium and longer term interests of the business they are leading and identify achievable goals.  They must be able to communicate, motivate and delegate to people effectively.
Giving and receiving feedback to and from all levels of the organisation will help them to really know what is going on, not only about productivity and profitability, but also to understand their staff and in particular motivation and morale, which may be crucial to business success.
In a fast-moving economic world, the CEO must also be flexible and agile, knowing when they need to learn and willing to do so. Complacency is not an option. Critical thinking is crucial.
Interestingly, in 2015, when PwC asked CEOs about the capabilities they felt were important a significant number mentioned humility, the ability to maintain a modest opinion of their own importance and capabilities which seems to be forgotten when it comes to pay levels.

How should CEO pay be decided and by whom?

Generally, in large companies the board of directors will approve CEO remuneration annually, often based on assessment by the company’s remuneration committee. The board’s recommendations will usually then be approved at the company’s AGM, or not, given the growing prevalence of shareholder rebellions.
A major difficulty is that any assessment will be largely results-based.  Have profits increased significantly or in line with a stated target? Have the goals for the year been achieved? What is the level of dividend payable to shareholders and how has it changed since the previous assessment?
But this is a largely top-down approach that can lead to a very short term view and includes no consideration of views, conditions and remuneration of employees, seeing them largely as a cost that should be kept under control rather than as active contributors to the health and longevity of the business.
These are all issues that are being examined in the Government’s Green Paper on Corporate Governance published in November 2016. It has arguably been prompted by the disaffection of those large numbers of people characterised as “the left behind” or “just about managing” that led to the majority vote for Brexit. There is still time to contribute to the consultation for which the deadline is 17th February.

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County Court, Legal & Litigation General

Corporate Governance review needs your responses

word cloud corporate governanceIt has received very little publicity but in November 2016 the Government published a green paper outlining proposals for a review of corporate governance.
The green paper provides information on the current situation. It includes proposals for changes and is being used by the Government to stimulate debate, consult with the wider community and gather contributions and suggestions.
The deadline for responses is Friday, February 17, and the paper includes a useful list of questions, as well as information on three ways to respond, either by email, through a website or as hard copy.
The paper covers three main themes, executive pay and its regulation, strengthening the voices of employees, customers and suppliers at board level and the current anomaly whereby large privately-held businesses are subject to lower standards than public companies.
A fourth section has been included asking for suggestions for other ideas or themes that could be explored to strengthen UK corporate governance.
In her introduction to the green paper the Prime Minister emphasises the pledge she has repeatedly made to strengthen the economy and UK business “for everyone, not just the privileged few”.
She argues that for people to retain faith in the economic system “big business must earn and keep the trust and confidence of their customers, employees and the wider public.”

Ethical behaviour is a must for all businesses

Ultimately no business, whether it is a SME or a large corporation, can hope to prosper and grow long term without earning the trust of its employees, customers and suppliers and even the wider community.
While the focus of this green paper is on larger concerns, it contains food for thought for all types of business.
The treatment of employees, fair levels of pay for both workers and senior executives, how the business relates to and contributes to the community in which it is located and how it treats its customers all contribute to its reputation.
While the larger business may seem to have the power to get away with sometimes questionable behaviour this is not a risk SMEs can afford to take if they want to survive and prosper.