Non-financial reporting should be extended to all large companies in order to restore public trust, IEMA said in its response to the government's consultation on reform of corporate governance.
The consultation, which closed today, asks for views on executive pay, how employees and customers should best be given a say in business decisions, and corporate governance in large private businesses.
IEMA’s response notes that s172 of the Companies Act sets out the statutory duties of directors. These include: promoting the success of the company; taking decisions based on the long-term consequences for the business; considering the interests of employees and business relationships with suppliers and customers; having regard to corporate environmental and community impacts; and maintaining a reputation for high standards of business conduct.
If these duties were shown to be properly and consistently applied, shareholders and stakeholders would have a high level of assurance that the business was being effectively managed, according to IEMA’s chief policy advisor Martin Baxter.
However, he added that public trust had been diminishing for quite a long time and it would take more than making businesses more accountable to shareholders for financial performance to restore confidence. A tendency for businesses to focus on short-term financial goals was undermining long-term strategies for enhancing social and economic value, said Baxter.
He argued that sustainability should be recognised as critical to rebuilding public trust and should be at the centre of reforms.
Currently, the Companies Act requires only companies quoted on the stock market to publish a report addressing social, human rights and community issues, and employee and environmental matters. The government should extend this legislation to cover privately owned firms with more than 250 employees, Baxter said.
IEMA wants stakeholder advisory panels established to provide a basis for engagement. These panels should also have a formal consultative role with board remuneration committees on executive pay and performance review, it adds.
Reporting requirements related to engagement should be strengthened, IEMA believes, while a non-executive director should be nominated by the board to engage stakeholders and report back.
‘We do not believe that effective corporate governance should be differentiated on the basis of
company ownership structure,’ said Baxter.
‘If there is a genuine desire from government to improve trust in companies, then underpinning transparency and accountability safeguards need to apply equally to public and private companies. This means extending non-financial reporting requirements, including mandatory carbon reporting, to all large companies.’
Executive pay should reflect the board’s success (or otherwise) in discharging the full extent of its duties, rather than simply narrow factors relating to short-term financial performance and share price, IEMA says.
Click here to read IEMA's consultation response in full.
