The UK government set out on an ambitious plan to overhaul the corporate governance rules that apply to large private companies and public companies listed on UK stock exchanges in 2021. The March 2021 White Paper on ‘Restoring Trust in Audit and Corporate Governance’ aimed to strengthen accountability, increase transparency, and enhance trust in the UK’s business sector.

However, October 2023 marked the withdrawal of the ‘Corporate reporting: The Draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations’ and therewith a major setback in the recent shift of emphasis on trustworthy corporate governance.

Following the sudden large-scale corporate collapses of the likes of Carillion, BHS and Thomas Cook in recent years, the reforms seemed almost inevitable to keep pace with modern expectations around corporate purpose, sustainability, and stakeholder accountability. Corporations are under ever-increasing external pressure to no longer merely focus on profitability alone but are expected to emphasise their positive contribution to society by their respective stakeholders, increasing the value of embedding social and environmental objectives.

The opposite pull comes from a concern of undermining the primacy of shareholder interests. Additional red tape inevitably imposed by any regulation requiring further reporting is bound to take a hit on a corporation’s profitability, at least on a short-term basis, due to the added costs involved in producing extra layers of corporate information in annual reports. This concern is amplified by the ongoing global economic uncertainty and recent shallow recession.

The proposed reporting regulations would have affected only the largest of the country’s companies – those with at least 750 employees and an annual turnover of at least £750 million. As such, it could well be argued that the additional red tape was justified in an effort to minimise the risk of a further major corporate collapse affecting numerous UK employees, as well as deflating trust in corporate stability with its potential knock-on effects on domestic and foreign investment in UK corporations.

On the other hand, additional red tape hinders the competitiveness of the UK by impacting the effectiveness of listed companies and the standing of the UK over other capital markets. Releasing listed companies from additional onerous reporting burdens and therewith levelling the playing field for UK companies in comparison with foreign markets is seen as vital in preventing a corporate exodus from the UK market. It allows companies the necessary space required to compete and drive the growth of the economy without being burdened by excessive regulation.

Supporters of the proposed regulations argue that the collapse of companies like Carillion demonstrated the need for improved corporate governance and accountability. The construction giant’s failure in 2018 came after years of financial juggling, excessive executive pay, and a lack of transparency around its operations. The fallout impacted not just shareholders but thousands of employees, pensioners, and businesses in Carillion’s supply chain.