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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