Rethinking governance: what should companies be responsible for?

It is time that we looked at the basic question of what should companies be responsible for, writes Jo Iwasaki.

The global financial crisis impacted not just on the economy, it intensified the challenges on corporate culture more broadly. Remuneration, short-termism, engagement with shareholders and, alongside these the business agenda and cultural issues such as diversity now form the core of the corporate governance debate.

All these issues highlight how companies are run. One might say that these issues have always existed. However, we have taken advantage of the current interest and explored whether the existing models of running companies need a major rethink.

Corporate governance looks at much more than board procedures and regulatory compliance. As recent business issues and controversies have demonstrated, shareholders, government, and the broader public are all interested in how companies respond to the changing business and social environment. The nature of the capital markets has changed so much it has influenced our thinking around the relationships between companies, boards and shareholders.

It is time that we looked at the basic question of what should companies be responsible for. Responsibilities need not be seen as onerous they prompt us to be alert to diverse interests that surround and affect businesses today. With a keener awareness of their surroundings and the willingness to respond, companies can be better prepared to identify where new opportunities are.

In recent ICAEW paper 'What are companies responsible for' we discuss four key responsibilities of companies. They are not a definitive or exclusive list, but we have dared to present them as a basis to prompt debate.

Achieving a business purpose

A company needs to have a business purpose that is easy to understand. As well as shareholders, everyone involved in a company, including employees, customers, suppliers and lenders, expect companies to generate continuing profits. However, maximising profit is not the only business purpose of a company.

A business should not be so focused on a specific purpose that it ignores changes in its environment. Innovation and adaptability are essential for a business to be viable over a corporate life.

Behaving in a socially acceptable way

Without being written down, social norms are there to set boundaries for what is acceptable as business culture and behaviour, in the societies where the company operates. Companies may need to, in some cases, actively go the extra mile to identify what is socially acceptable. This would certainly cost time and resources.

Companies also need to recognise that different communities (e.g. the financial services sector, or a particular industry) develop their own norms and these may be very different from those prevalent in a wider society.  This gap may suddenly become apparent when their values are subject to external scrutiny.

Meeting legal and regulatory requirements

Legal and regulatory requirements relate to issues such as employment, health and safety, anti-corruption and taxation for example and private contractual, legal and financial obligations such as company pensions and debt covenants.

Being based on law, these are mostly public, and understood by most people. Breaches of these requirements may lead not only to formal sanctions and litigation but more importantly, reputational damage.

Stating how their responsibilities are met

Companies are expected to acknowledge their responsibilities, provide information on how they meet them and be accountable. This is about acknowledging those responsibilities publicly, reporting on how they are discharged, and being answerable for consequences. It helps companies construct a robust foundation for building and maintaining trust.

If companies are fully aware of the range of their responsibilities and attempt to meet them, legislators and regulators can focus on developing codes and practices that are proportionate. This is a big 'if' and to imagine such change to happen instantly is naïve. However, without a change in how we think, the effectiveness of laws and regulations would be limited. Only when companies embrace the principles which are underlying laws and regulations, will we see corporate behaviour change. And an end to the rather cynical box-ticking culture at present.

Jo Iwasaki is Head of Corporate Governance at ICAEW 

A statue of a dragon marks the boundary of the City of London. Photograph: Getty Images

Jo Iwasaki is Head of Corporate Governance at ICAEW.

Photo: André Spicer
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“It’s scary to do it again”: the five-year-old fined £150 for running a lemonade stand

Enforcement officers penalised a child selling home-made lemonade in the street. Her father tells the full story. 

It was a lively Saturday afternoon in east London’s Mile End. Groups of people streamed through residential streets on their way to a music festival in the local park; booming bass could be heard from the surrounding houses.

One five-year-old girl who lived in the area had an idea. She had been to her school’s summer fête recently and looked longingly at the stalls. She loved the idea of setting up her own stall, and today was a good day for it.

“She eventually came round to the idea of selling lemonade,” her father André Spicer tells me. So he and his daughter went to their local shop to buy some lemons. They mixed a few jugs of lemonade, the girl made a fetching A4 sign with some lemons drawn on it – 50p for a small cup, £1 for a large – and they carried a table from home to the end of their road. 

“People suddenly started coming up and buying stuff, pretty quickly, and they were very happy,” Spicer recalls. “People looked overjoyed at this cute little girl on the side of the road – community feel and all that sort of stuff.”

But the heart-warming scene was soon interrupted. After about half an hour of what Spicer describes as “brisk” trade – his daughter’s recipe secret was some mint and a little bit of cucumber, for a “bit of a British touch” – four enforcement officers came striding up to the stand.

Three were in uniform, and one was in plain clothes. One uniformed officer turned the camera on his vest on, and began reciting a legal script at the weeping five-year-old.

“You’re trading without a licence, pursuant to x, y, z act and blah dah dah dah, really going through a script,” Spicer tells me, saying they showed no compassion for his daughter. “This is my job, I’m doing it and that’s it, basically.”

The girl burst into tears the moment they arrived.

“Officials have some degree of intimidation. I’m a grown adult, so I wasn’t super intimidated, but I was a bit shocked,” says Spicer. “But my daughter was intimidated. She started crying straight away.”

As they continued to recite their legalese, her father picked her up to try to comfort her – but that didn’t stop the officers giving her stall a £150 fine and handing them a penalty notice. “TRADING WITHOUT LICENCE,” it screamed.


Picture: André Spicer

“She was crying and repeating, ‘I’ve done a bad thing’,” says Spicer. “As we walked home, I had to try and convince her that it wasn’t her, it wasn’t her fault. It wasn’t her who had done something bad.”

She cried all the way home, and it wasn’t until she watched her favourite film, Brave, that she calmed down. It was then that Spicer suggested next time they would “do it all correctly”, get a permit, and set up another stand.

“No, I don’t want to, it’s a bit scary to do it again,” she replied. Her father hopes that “she’ll be able to get over it”, and that her enterprising spirit will return.

The Council has since apologised and cancelled the fine, and called on its officials to “show common sense and to use their powers sensibly”.

But Spicer felt “there’s a bigger principle here”, and wrote a piece for the Telegraph arguing that children in modern Britain are too restricted.

He would “absolutely” encourage his daughter to set up another stall, and “I’d encourage other people to go and do it as well. It’s a great way to spend a bit of time with the kids in the holidays, and they might learn something.”

A fitting reminder of the great life lesson: when life gives you a fixed penalty notice, make lemonade.

Anoosh Chakelian is senior writer at the New Statesman.