Originally posted on Business Post 11 April 2021.
Britain is belatedly tightening up its corporate governance, but Ireland plays by the EU’s rules and ought to act accordingly
While at various times over the past few months, hospitals, financial institutions, sports bodies and even a charity have featured in the headlines here for failures or alleged failures in financial or corporate governance, the British have also had their fair share of high-profile company missteps.
The likes of Carillion, BHS and Patisserie Valerie were part of a continual cycle of high-profile corporate failures resulting in what has been described as a “palpable” crisis in public trust. This has ultimately led to the British government’s publication last month of a white paper entitled Restoring Trust in Audit and Corporate Governance.
According to its foreword by Kwasi Kwarteng, the British business minister, the plan is to help companies “build back stronger and better equipped to face tomorrow's challenges and enable the UK to remain a premier global centre for investment”.
Post-Brexit, Britain has already lost ground in financial services and exports of goods, so this white paper reflects more than a newfound concern over corporate failures. It is not surprising that the British government will look for competitive advantage anywhere it can get it.
Corporate failures do more than just damage the employees, creditors and shareholders who are directly involved. According to research published earlier this year by Edelman, the global consultancy, businesses are now more trusted than governments in 18 of the 27 countries they surveyed.
Not only that, businesses are generally seen as being more competent than the governments of the countries in which they operate. Whichever way you choose to view results like these, they bear out that trust is essential for a healthy business and therefore a healthy investment environment.
The white paper is a distillation of at least three previous reviews commissioned by British governments. Those reviews mainly concerned the work and conduct of the auditors of companies, and of the government institutions which regulate those auditors.
The current paper goes some distance further in its examination of the roles of both directors and shareholders in corporate failures. The emphasis is on larger companies initially but it is clear that the medium-term intention is for the suggested measures to extend down the pecking order of corporate size.
The proposals recognise that shareholders do not have much to do in terms of the day-to-day running of the businesses they own, but that does not absolve them from all responsibilities towards the way those companies operate. Shareholders should have a chance to approve the audit policies of the companies they own. They should also be allowed to propose areas of emphasis in the audit if they believe that particular issues or activities within the company need to be scrutinised.
Government regulators are to be given additional powers of investigation, not only over the accountancy firms which carry out audits but also over the companies which are audited. The role and function of auditing firms will receive a significant shakeup under the proposals, but it is the ideas concerning the conduct of company directors which perhaps reflect the newest thinking by the British authorities.
There are to be new sanctions for individual directors who are found wanting when it comes to the proper governance of a company. After all, as the white paper puts it, it is company directors who have primary responsibility for fraud prevention and detection. Boards of directors have collective responsibility. This collegiate responsibility for directors suggests that the free ride for non-executive directors will come to an end, if there ever was one.
This is heavy duty stuff. It is made all the more serious by a widespread expectation that this white paper is not merely a consultation paper, but rather an expression of intent on the part of the British authorities. It contains almost 100 specific consultation questions, but it is understood that any responses will serve to fine-tune rather than modify the thrust of the proposals. All this has consequences for commerce on the island of Ireland.
Up to now, Irish financial and corporate governance has largely been dictated by the pattern of British rules and norms. Financial and company legislation and regulations more often than not originated in the UK, and were then sprayed green for implementation in Ireland.
The proposed new British regime would be intrusive, which is not necessarily a bad thing. It would also be costly and burdensome for many businesses, which is undoubtedly a bad thing if no benefits flow from it. Post-Brexit, it should not automatically follow that Ireland takes the British lead on corporate regulation.
Going it alone, as the British economy is already finding, comes at a cost. The Irish economy is not going it alone because it operates within the EU framework. Our patterns of accountability, regulation and corporate governance will in the future come more from the European institutions than from British institutions.
There is plenty of evidence that we need to tighten up our regulatory regimes to ensure that individuals are held accountable. While this is the direction the British are taking, the appropriate solution for Ireland may not be simply to follow the British example.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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