First Steps Towards a Wealth Creation Manifesto

Mark Goyder is a senior advisor to the Board Intelligence Think Tank. He’s the founder of Tomorrow’s Company and co-author with Ong Boon Hwee of Entrusted: Stewardship for Responsible Wealth Creation.

Is the governance and proper conduct of our companies a priority for the UK government and Kwasi Kwarteng, the Business Secretary? It would appear that the answer is “No”.

The whole UK system of listed companies depends for its regulation on the workings of the Financial Reporting Council (FRC). Mr Kwarteng and his department seem to be letting things drift. The FRC lost its chair in May 2020. The government has decided not to renew the terms of two of its non-executive directors (NEDs) — both women, as it happens. With retirements, the FRC will shortly be left with just three NEDs. Its interim chair, Keith Skeoch, steps down in October and, the FT tells us, has warned in the FRC’s own annual report:

“There is a grave risk, given recent experience, that these appointments will not be completed by the time myself and the other directors leave the board . . . This will leave gaps in the governance structure and may create delay in the important board reform and transformation process underway until such time as the recruitment process is completed.”

This echoes criticism by Sir John Kingman, the man appointed by the government to make recommendations to improve the regulation of our companies and their governance. In accordance with Kingman’s recommendations, the FRC is due to be replaced in 2023 by a new, beefed-up body, called the Audit, Reporting and Governance Authority. Sir John has lost patience with that government.

To Kingman, the FRC’s recent personnel losses are indefensible for a body that is responsible for promoting good corporate governance:

“This is no way to govern, let alone strengthen, a major regulator whose work is fundamental to trust in companies, accounts and the working of markets.”

It will be 2023 before his recommendations are implemented and, by October, the FRC will be limping along with just three non-executives to answer to.

Two weeks ago, I argued that changing the duties of directors by a Better Business Act would do little to advance the cause of responsible wealth creation in the interests of those who come after us. There are so many interventions that could make more impact on the stewardship and behaviour of our companies.

We need government to:

• Have a clear concept of the kind of companies and the kind of wealth creation it wants to encourage.
• Make sure that law and regulation are progressively more aligned to this.
• Practise what it preaches in its roles as client, investor, and capital markets influencer.

Here are four interventions to start with:

1. Good governance. Attend to the good governance of the body which is itself responsible for good governance (the FRC).
2. Procurement. Again, start close to home. Use the enormous government/public purchasing power of over £225bn a year to ensure that companies selected for contracts display good character and a commitment to ESG. Encourage the use of the Social Value Act and BS95009 (the “Trust Test”), to do due diligence on the companies from which the public sector is buying.
3. Investor stewardship. It was announced this week that the government is ready to sell the next tranche (around 15% of the total) of its shares in NatWest Group (formerly RBS). Instead of selling such shares to isolated individual shareholders who can have little stewardship influence over remuneration, climate impact, or other aspects of the bank’s behaviour, create a stewardship mutual (as suggested by Ong Boon Hwee and myself in chapter seven of Entrusted).
4. Regulation with a focus on future generations. The UK government is hosting this year’s United Nations Climate Change (COP) conference. Priorities of the COP conference include the mobilisation of climate finance by both the public and private sector financial institutions. The body regulating the UK’s financial institutions is the Financial Conduct Authority (FCA). Yet the FCA’s objectives are all about individuals, businesses, and the whole economy today, with no reference to the relationship between finance and future generations.

The tools exist already to act on the first two of these items.

The second two would take more planning, but such planning would come naturally from a government that wanted to encourage healthy companies with a focus on investment, good stewardship, and delivering long-term success for the benefit of staff, shareholders, and society.