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Labour’s corporate governance approach ‘risks throwing baby out with the bathwater’

19 Nov 2019

city

Responding to John McDonnell’s speech on rewriting the rules of the economy, Edwin Morgan, Director of Policy at the Institute of Directors, said:

“It’s good to see Labour grappling with the mechanisms behind how British companies are overseen. However, listening to McDonnell’s speech, you could be forgiven for not realising that the UK’s corporate governance framework is admired across the world, and is an important source of competitive advantage.

“There’s certainly room for improvement and it’s right for Labour to look abroad for new ideas, but the grass is not always greener. The strength of the London stock market shows that investors like the clarity of accountability and decision-making our version provides, so we should be wary of changes that could cut off the global investment that helps fuel UK growth.

“Labour’s approach risks throwing the baby out with the bathwater. There is plenty of support in the business community for improving the audit process, and more employee ownership is a goal we support. These proposals, however, jump to the most prescriptive and cumbersome end of the scale.

“To be successful, a stakeholder model actually requires the buy-in and co-operation of all stakeholders. A top-down, regulatory approach won’t achieve this, and Labour can’t just develop their plans in a backroom at party HQ. If elected they will have to achieve their goals by talking to directors, shareholders, the stock exchange and everyone else involved in implementing our governance rules.”

On two-tier boards, Edwin said:

“Some European countries prioritise two-tier boards, but it’s a question of different, not better. Increasing firms’ flexibility to take this approach is a reasonable step, but that doesn’t mean you can import a different business culture wholesale, or that supervisory boards prevent corporate failures.”

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