Corporate Governance at its best or Big Brother flexing his muscles?

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Enhancing Transparency and Trust in UK Companies – Consultation Paper by Business Secretary, Vince Cable, 15 July 2013.

Monday 15 July 2013, Business Secretary, Vince Cable, released a discussion paper entitled “Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business”. It outlines the proposed reforms on corporate governance for UK companies including the imposition of stringent measures on incompetent management with the view to restoring public confidence in UK businesses and their leaders.

A range of proposals for the enhancement of transparency and increased trust in UK businesses are considered. This is the first stage of the reform process and comments and evidence on the matters considered can be submitted to the Business Environment Directorate by 16th September, 2013.

The financial sector will be significantly affected by any reforms made as a result of this consultation. It is clear that the banking sector has been targeted in light of the financial crisis of 2008 and the recommendations proposed by the Parliamentary Commission on Banking Standards for reform in the banking sector have been implemented in the paper. However, the proposed reforms are not purely for the banking sector and may be extended to UK businesses generally including other regulated sectors.

The key reform considerations are to:

1. Enhance the transparency of company ownership

The motivation behind enhanced transparency of ownership is to ensure that the British public knows who owns and controls British businesses. It is hoped that the proposed reforms will assist in tackling serious criminal activities such as tax evasion, money laundering and terrorist financing.

The proposed components of enhanced transparency reform are:

a) The maintenance of a central registry of a company’s beneficial ownership information with the Registrar of Companies;

“Beneficial Owner” is defined as per the Money Laundering Regulations 2007 as ‘any individual with an interest in more than 25% of the shares or voting rights of the company; or who otherwise exercise control over the way that the company is run’.

Identification of Beneficial Owners will already be a standard procedure for many companies in order to satisfy anti-money laundering and service contract requirements. The two key differences are that the information supplied would now be in the public domain and would disclose not only percentage of shares but also “voting rights”. This measure is likely to include Limited Liability Partnerships (LLPs).

b) The prevention of the misuse of corporate entities by:

  • the prohibition of new bearer shares and ultimately their abolition; 
  • the restricted use of nominee directors; and
  • the prohibition of corporate directors.

These modes of management can be used to front a business thus concealing the real controllers who could be engaged in criminality and impropriety.

2. Increase trust and confidence in the management of UK businesses

These proposals are being considered in light of recent high profile corporate scandals. It is considered that trust has been significantly diluted due to the negligent behaviour and attitude of some senior executives of UK businesses. Failure to be accountable for improper and or fraudulent behaviour by some senior executives, and the lack of adequate sanctions, has highlighted a void in the UK corporate regulatory regime which needs to be addressed so as to restore public confidence.

The proposed components for increased trust are to:

a) Overhaul and strengthen current procedures for mismanagement;

It is proposed to reform directors’ disqualification procedures in two ways: First by widening the factors considered by the court in disqualification proceedings generally and extending the period of disqualification from two to five years. Secondly, by introducing provisions to take into account material breaches of relevant sectorial regulation.

b) Extend the powers of regulators (e.g. Pensions Regulator, Financial Conduct Authority and Prudential Regulation Authority) to punish delinquent and criminal behaviour of those directors within the regulated sector who are guilty, and to exercise those powers for other sectors, if appropriate;

This would mean barring individuals who are guilty of a breach of duty from acting in the capacity of director in a particular sector and/or barring them from acting as a director at all.

c) Refine and, if necessary, increase sanctions for those who are wilful, careless or delinquent in discharging their management responsibilities;

d) Improve governance generally, particularly in the banking sector;

Directors’ responsibilities in the banking sector (and possibly other key or regulated sectors) will be clarified. In particular, the statutory duties of bank directors (and maybe those of other regulated sectors) may be amended to make the safety and stability of the business their primary consideration, over and above shareholders’ interests.

e) Improve the financial redress for clients;

Directors will be held personally accountable for financial loss suffered by creditors – this could be in conjunction with disqualification orders.

f) Extend overseas restrictions;

Any restrictions placed on a director for criminality in another jurisdiction should also be imposed on him if he is being considered or is appointed a director in the UK.

Who will be affected?

These reforms will apply to both private and public companies. It is also stated in the paper that “there is a clear case for the inclusion of Limited Liability Partnerships (LLPs) in these proposed reforms”.

Conclusion

The paper acknowledges that the overwhelming majority of UK businesses operate within the confines of the law and make a signification contribution to the UK economy and society. The purpose of the reforms is to level the playing field by weeding out the corrupted few. It has been highlighted that these new robust powers are to be used only in appropriate cases and honest directors do not need to fear any new sanctions implemented where they have acted in good faith.

Next steps

All companies and their directors will need to consider the impact of these potential reforms on their corporate governance procedures. 


29 July 2013
 


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