Merryn's Blog

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.

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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

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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).

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).

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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.

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