Corporate Governance code stifles strong leaders and fails to curb executive pay, says former CEO

THE UK's Corporate Governance Code should be scrapped because it stifles strong leaders and fails to control executive pay, according to a leading Yorkshire business figure.

Tom Brown believes the UK's Corporate Governance Code is not working Photo:Yui Mok/PA Wire
Tom Brown believes the UK's Corporate Governance Code is not working Photo:Yui Mok/PA Wire

Tom Brown, who served as a chairman on 15 companies, believes that many boards have lost their focus because they have become dominated by accountants and investment bankers who do not understand how the company works.

Mr Brown, a former managing director of Fenner and CEO of United Industries, told The Yorkshire Post: “What do Royal Bank of Scotland, BP, and Carillion have in common? They all had disasters, and they all complied with the UK Corporate Governance Code that quoted companies are expected to apply.

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“What do Dyson, JCB, and John Lewis have in common? They are all iconic British successes, and as private companies they do not need to comply with the code.”

He added: “The code does not work. It may be well intended, but there is no firm evidence that it is effective – I know of no research that has established a correlation between adherence to the code and company performance.

“A new version of the code comes into force on January 1 2019; mercifully it is shorter, but it perpetuates the mistaken concepts of its predecessor.

“The approach to people issues is misguided, applying root cause analysis to human relations in the same way as engineers do to

unreliable products.

“The result has stifled corporate leadership; Dyson, JCB, and John Lewis have all been run by executive chairmen, taboo under the code, but strong leadership has been a crucial factor in these firms’ successes.

“In contrast the three disasters mentioned all had ‘independent’ chairmen, who were consequently not experienced in the business.”

Mr Brown, who retired after a 45-year business career in 2015, said the code has been ineffective in controlling executive pay, and the formal remuneration committees that it requires have “facilitated the explosion”.

He added: “External advisers supply graphs of the rewards in comparable companies, and it becomes very difficult to justify paying a CEO less than the median; if they’re not very good they should not be there, and if they are good they should get at least the

median – I’ve never seen a company’s annual report extolling its peanuts and monkeys policy. And so the median moves up with mathematical inevitability.”

Mr Brown said an essential, and overdue, step would be to redefine a director’s fiduciary duty as being to a wider range of stakeholders, and not just shareholders. He also called for employee representation on boards.

A spokesman for the Financial Reporting Council said: “In the 26 years that the UK Corporate Governance Code has been in existence the reputation of the UK as a home for global investors’ capital has improved enormously.

“The code is an important factor in promoting trust and confidence that drives investors to support UK companies to grow and succeed, provide jobs and support communities.

“Many other countries have emulated the UK code. This week sees the launch of a new corporate governance code for larger private companies, partly in response to calls following the collapse of BHS but also as part of a wider drive to reverse the decline in public trust in UK business.”