We don't need new laws to make companies behave better
We don’t need a load of new laws to sort out the governance problems at UK companies, says Merryn Somerset Webb. We just need to enforce the ones we have.
I wrote here a few weeks ago that the tide was about to turn for the UK's big corporations. The evidence is building. This week there has been more talk of Theresa May's plans for forcing better corporate governance. That's interesting in itself. More interesting is the fact that the big fund management firms seem to be prepared to offer her some support.
So they bloody should, you will say, given that it is supposed to be their jobs as institutional shareholders to keep company management on the straight and narrow. You are right. But we are where we are
Until very recently most big shareholders have acted more as bad behaviour enablers than good behaviour enforcers. So I am glad to see that Aberdeen Asset Management has suggested to Parliament's Business, Energy and Industrial Strategy Committee (which is looking into corporate governance) that businesses should get the approval of at least 75% of shareholders to implement their remuneration policies (annual votes on pay are still non binding).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Hermes is with the programme too: it's just published a report on the matter with some firm suggestions as to how matters can be improved (in a nutshell: by paying managers less money in a less complicated way).
But it isn't just pay where big firms are starting to feel the heat: their tax affairs are under more scrutiny too. There has also been an announcement from index provider MSCI that from the start of 2017 it is to change its governance regulations to punish any companies it reckons are using aggressive tax avoidance tactics. So if they are involved in legal battles over tax, if their tax structures are hard to understand or if they are paying effective rates of tax well below those their revenues would suggest they should be (the difference is 8% for the world's biggest companies, says the FT), they will find themselves slipping down MSCI's ESG (environmental, social, governance) rankings.
This matters. Some investors take a moral stand on tax, but even those who do not are now obliged to pay attention to how much companies pay. No one wants to be holding shares in a company priced for perfection when the taxman comes knocking and, as one investor told the FT, "investors face unforeseen risks from companies that so not disclose adequate tax policy and practices, which may disguise the value of genuine economic activity versus tax planning."
The really good news here, however, comes from Robert Lea writing in the Times. Look closely at the Companies Act, he says, and you will see that we don't really need a whole pile of new rules to sort out the governance problems at UK based companies. Section 172 makes it clear that companies are not allowed to just be run in the short-term interests of their shareholders. Their directors have a duty to promote the success of the company, but also to act with regard to the "interests of the company's employees" as well as the "company's business relationships with suppliers, customers and others."
It might be time, as Lea says, not for May to think of new legislation, but to recognise that we have enough, and to hire a pile of pernickety inspectors to have a goat enforcing it.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Chase boosts easy-access interest rate - savers could earn 4.75%
Chase is offering a boosted interest rate which is fixed for six months, on top of the standard variable rate
By Jessica Sheldon Published
-
Investing in defence as the world rearms
As countries in Europe and worldwide increase military spending amid mounting geopolitical tensions and risks, investors are taking a fresh look at defence companies
By MoneyWeek Published
-
Beating inflation takes more luck than skill – but are we about to get lucky?
Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
By Merryn Somerset Webb Published
-
Rishi Sunak can’t fix all our problems – so why try?
Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
By Merryn Somerset Webb Published
-
Young people are becoming a scarce resource – we should value them more highly
Opinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Ask for a pay rise – everyone else is
Opinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
By Merryn Somerset Webb Published
-
Why central banks should stick to controlling inflation
Opinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How St Ives became St Tropez as the recovery drives prices sky high
Opinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
By Merryn Somerset Webb Published
-
The real problem of Universal Basic Income (UBI)
Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
By Merryn Somerset Webb Published
-
Why an ageing population is not necessarily the disaster many people think it is
Opinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
By Merryn Somerset Webb Published