What is a company board for now?
By Professor Bob Garratt
Published online by the Royal Society of Arts Building Bridges To the Future Post-Covid series.
This essay is a provocation to all involved in corporate governance, and a practical response triggered by Bob’s clients, students and colleagues asking him ‘what is a company, and a board, for now?’ It reflects on the same question asked by Charles Handy in 1990 in his inaugural RSA lecture ‘What is a Company For?’ that led to international debate and the formation of Tomorrow’s Company.
Bob argues that today’s disillusioned public, dejected shareholders, disorientated politicians and despairing directors show a lack of understanding and debate about what good governance means. He advocates the dropping of all current corporate governance codes and a resurrection of the 2006 Companies Act Sections 171 (Directors’ Duties) and Section 172 (Company Purpose) as the foundation of a new, simple Code of Good Practice – which is legally enforceable.
He argues that the present non-system of corporate governance is unfairly weighted towards blaming boards when the other major players – owners, regulators, legislators and public oversight – are gaining increasing rights without increasing duties. He argues for a new national and international system of corporate governance where all five parties are in frequent debate. Their debate must centre around the content and developing practice needed to reassure the public and themselves that it is possible to stabilise our currently destabilised society through a strong focus on, and measurement of, good governance.
In his research he has been astounded as to how few current ‘players’ in the corporate governance world know the content of Sections 171 and 172, let alone try and live them. So he returned to the legislators who passed the 2006 Companies Act by giving two talks at Westminster. He found that only a handful of current legislators in The Houses of Parliament and the Lords had any knowledge of the Companies Act. 90% were not in Parliament at the time of its passing and there is no induction process in this area for new MPs and Lords to understand the context and content of the Act. Although most had strong opinions on what companies and boards should do, very few had any idea of the legal framework that they had already created for this.
Indeed the Labour Party Manifesto of 2019 contains promises of having companies focus strongly on their impacts on the environment, communities, suppliers, and customers as well as the distribution of wealth, without appreciating that they had already passed such legislation 12 years before as these were all part of section 172. Neither did they realise that Section 171 focused on the legal directoral duties of Care, Skill and Diligence in their decision-taking to ensure the future health of their company. Even more worryingly none seemed to realise that shareholders do not own a company.
In the paper Bob goes deeper historically and suggests that we are really seeing in 2020 a fractal of the age-old human issues of the creation and distribution of Wealth, Justice and Power, specifically the balance of governance powers. He argues that this is the future challenge for boards – not tinkering around with the Codes.
Bob Garratt is a director of Good Governance Ltd, specialising in board review and development, a very part-time Professor and External Examiner for the Gulf Co-operation Council’s Board Development Institute. His latest book is Stop The Rot: Reframing Governance for Directors and Politicians. His best-selling book is The Fish Rots from The Head: Developing Effective Directors.