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: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.