Trust in Corporate Governance: A Distant Mirage

May 07, 2024

Trust in Corporate Governance: A Distant Mirage

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.

Similarly, the demise of retailer BHS in 2016 and travel company Thomas Cook in 2019 highlighted corporate governance failings and insufficient oversight from directors. In BHS’s case, the sale of the struggling chain to an opaque ownership structure with little investment led to significant pension deficits when it collapsed.

It seems clear that major corporate governance reforms can only be realistically legislated if they are in line with the wider global markets’ regulations. Corporations would be wise to voluntarily disclose and report data relating to its corporate governance in an effort to appease stakeholders as well as sceptical investors. Increased transparency around issues such as climate risk, labour practices, and board oversight could help rebuild public trust.

Ultimately, such action would always come down to a cost-benefit calculation for corporations. Given the questionable short-term return on investment involved, it is unlikely UK corporations of significant size will take the plunge and are more likely to continue to closely stick to the bare minimum reporting requirements as a safer option pacifying shareholders in the current economic climate.

It is therefore fair to maintain that the UK, in withdrawing the draft regulations, is far from ‘restoring trust in corporate governance’. Stakeholders still remain in the 2021 White Paper darkness and UK corporations can rest assured of no foreseeable added red tape, at least until a more global push for accountability in corporate governance gathers momentum. Rebuilding public trust remains a distant mirage.

How we can help

Putting the perfect corporate governance structure in place in any business is a difficult task. At Karam, Missick & Traube, our corporate and commercial teams are available to help discuss the likely impact of corporate governance policies on a business’ profitability as well as their suitability, taking into account specific shareholder and/or stakeholder bases. At KMT we pride ourselves on delivering a personalised service to all corporate matters from formation to insolvency. 


Liam Schaechter

* The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. KMT Law accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact KMT Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of KMT Law.