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Restoring trust in audit and corporate governance - TUC response

Report type
Consultation response
Issue date
Introduction

The TUC welcomes the opportunity to respond to the BEIS consultation on audit and corporate governance. The consultation sets out proposals from three reviews of audit that followed the collapse of Carillion. While the TUC recognises the importance of audit and its role in ensuring accurate accounts on which all stakeholders can depend, the failures that led to Carillion’s collapse were not only failures of audit. There were also serious failures of decision-making of the Carillion board, which contributed directly to the decline and eventual collapse of the company, with disastrous consequences for suppliers, sub-contractors and thousands of workers who depended on Carillion for their livelihoods.

While the consultation raises important questions about audit, audit reform alone will not prevent another Carillion. Wider corporate governance reform is needed and crucially reform that will change the culture and priorities of the boardroom to improve the quality of board decision-making. For this, reform to directors’ duties and board composition are vital.

Our submission focuses on a proposal to change the word ‘employee’ to ‘workforce’ throughout the Companies Act, so that its requirements cover the whole workforce, rather than only directly-employed employees as at present; reform of directors’ duties to remove shareholder primacy and require directors to promote the long-term success of the company as their primary aim; reform of board composition to require that worker directors comprise one third of the board at companies with over 250 workers; and sets out the TUC’s response to a number of the consultation questions.

Download full response (pdf)

Key recommendations

Change the word ‘employee’ to ‘workforce’ throughout the Companies Act (covered in pages 3 – 14)

·       This amendment would have the effect of broadening the scope of directors' duties and reporting requirements in the Companies Act to require companies to report on and have regard to their whole workforce, rather than just their directly-employed employees as at present.

·        Indirect employment was much less prevalent when the Companies Act was last revised in 2006 and the word 'employee' was clearly not intended to differentiate between different parts of a company's workforce. The amendment would update the Companies Act to reflect the modern labour market.

·       Unfortunately, the use of the word 'employee' does affect the quality and accuracy of company reporting. Some companies that employ a significant proportion of their workforce indirectly or through a franchising model exclude those workers from their company reports, despite the latter's contribution to the company's products/services and profitability. Examples of this in are included in our submission.

·       Using the word 'employee' in the Companies Act affects all the reporting regulations that are laid using its powers. Most workforce reporting requirements stem from company law, not employment law, so without this amendment it is impossible to require companies to report on their whole workforce or on their employment model, as recommended by the Taylor Review.

·       This change has already been reflected in other corporate governance rules, including the 2018 Corporate Governance Code and the Wates Corporate Governance Principles for Large Private Companies, which both use ‘workforce’ throughout.

·       As amending the Companies Act will be necessary to implement the government's proposals in the consultation, this creates the opportunity finally to close this loophole. It is 15 years since the Companies Act was last amended so this opportunity must not be missed.

Reform directors’ duties to require directors to promote the long-term success of the company (covered in pages 14 – 17)

The submission argues that shareholder primacy contributed directly to the collapse of Carillion. The company paid dividends to shareholders every year until the summer of 2017 – six months before the company collapsed, leading to the loss of thousands of jobs. From 2012 to 2016 - during which the company was cash negative in 2012, 2013 and 2016 - Carillion paid out £376 million in dividend payments, while generating only £159 million in cash. In 2016, when Carillion lost £38 million in cash, the company paid its highest ever level of dividends of £78.9 million.

Directors’ duties should be reformed so that directors are required to promote the long-term success of the company as their primary aim, taking account of the interests of stakeholders including the workforce, shareholders, local communities and suppliers and the impact of the company’s operations on human rights and on the environment. The TUC’s proposed wording for directors’ duties is set out in the submission.

Worker directors should comprise one third of the board at companies with over 250 workers (pages 17 – 18)

Reform of board composition is vital to change the culture and priorities of the boardroom and improve the quality of board decision-making.

Worker directors would bring people with a very different range of backgrounds and skills into boardrooms, helping to challenge ‘groupthink’. There is strong evidence that more diverse boards make better decisions. Workers have an interest in the long-term success of their company and their participation would encourage boards to take a long-term approach to decision-making. They would bring direct experience to bear on the important area of workforce relationships, a key area for company success. It is clear from companies that have worker directors that bringing the perspective of an ordinary worker to bear on boardroom discussions is particularly valued by other board members.

It is also a matter of justice and democracy that the workforce should have a voice in company decisions, given the significant impact of those decisions on their lives.

Worker directors are the norm across most of Europe. Countries with strong workers’ participation rights perform better on a whole range of factors, including R&D expenditure and employment rates, while also achieving lower rates of poverty and inequality.

The TUC believes that elected worker directors should comprise one third of the board at all companies with 250 or more staff.

The TUC’s response to the consultation questions (pages 19 – 28)

Download full response (pdf)

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