The shareholder theory as agents changed the company’s records

The UK has long been regarded as a world-leader in corporate governance, combining high standards with low burdens and flexibility” (gov.uk, 2017). This is how the British government describes itself within the corporate governance global landscape, and there is plenty of evidence to suggest that the United Kingdom (UK) is indeed the world leader for corporate governance worldwide. The UK pioneered the world in establishing corporate governance, creating the Committee on Financial Aspects of Corporate Governance founded by the Accountancy profession, London Stock Exchange (LSE) and the financial reporting group. The committee followed the two aspects of accounting and the stock market, laying down the foundations of theoretical frameworks that would be adopted by other countries (Lightfoot, 2017). The US and Britain shared many similarities in their corporate governance frameworks, specifically the ideology of trying to maximise shareholder’s dividends. However, the Enron scandal in 2001, which was caused by an excess of the shareholder theory as agents changed the company’s records to maximise profit for the principles, completely changed the corporate governance in the US, who established the Sarbanes Oxley legislation (SOX) a year later in 2002 (Stiftung, 2010). This legislation was seen as different and stricter from the ‘flexible’ British system, but for the first time offered an insight on whether the British corporate governance frameworks were the best, on a large scale. From the 29th of November 2016 to the 17th of February 2017 the UK government went through a consultation period; in which stakeholder voice, executive pay, boardroom diversity         and many other issues were all discussed.

 

One of the issues addressed by the reform was the issue of diversity within the boardroom with the goal being to improve the diversity of gender and ethnic groups within the boardroom. This is an attempt to combat the conventional demographic trend of boards that consist of males from a usually white background. Boards are agents to the shareholders and as a result major decisions such as strategy and the direction the business is taking are decided there.

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To increase the ethnic diversity within the boardrooms of FTSE100 and FTSE250 companies, the UK government is pressuring companies to hire a people of different ethnic groups by backing a review led by Sir John Parker. The review itself is recommending that FTSE100 companies have a minimum of one coloured director by 2021 and a similar idea for FTSE250, hiring a coloured director by 2024 (reform report). Not only has the government pressured for these director roles, but have also commissioned inquiries into the challenges that non-white ethnic minorities face within businesses ‘from recruitment through to the executive level’ (reform report). The Department of Work and Pensions (DWP) have calculated that there was an 11.1% employment difference between the general population of the UK, and ethnic minorities that reside within the UK in 2015 (House of Lords, 2016). This is on a downwards trend, meaning that since records began in 1993, the employment difference gap has been getting smaller every year, implying that actions taken by the government are having a positive effect in improving employment rates for ethnic minorities. Furthermore, in 2015 ethnic minorities within the UK had a 1.4% increase in employment, whereas the overall population only had a 0.9% increase. This employment increase over time on the ethnic minority level employment will have a trickle effect on the number of directors who are of an ethnic minority in the future. If there is a larger BME talent pool available, then the FTSE250 and FTSE100 companies will have an easier time conforming to the pressure from the government, hiring more coloured directors, assuming that they are not institutionally racist. With national reviews – such as Baroness McGregor-Smith’s – still providing information about challenges BME people are facing, problems that are causing divides and setbacks to ethnic minorities are being identified and eliminated. This suggests that the measures the government are taking to improve ethnic diversity in boards are proving effective, and they are on track to meet short-term and long-term targets.

 

On the other hand, gender diversity within boardrooms seems to be stagnating in more recent years after initial government actions showed signs of progress. In 2011 Lord Davies made a report on the roles of women in FTSE350 boardrooms, with a goal of 25% of the positions in the boardroom being occupied by women. At the time of the creation of the review, female directors made up just 12.5% of FTSE100 boards and by 2015 the goal of 25% was reached (reform report). This progress was extremely promising as it showed that having 50/50 male-female boardrooms was possible in the long term, with the government accrediting the increase in percentage to the work ethic and drive of women wanting to climb the corporate ladder. In 2016, the government authorised a new review, based off of the recommendation from Lord Davies’ report. This new report increased the 2011 target from 25% of board roles to 33% in FTSE350 companies. This increase was mentioned in the initial report by Lord Davies, but he suggested that the 33% target would be set by 2020, meaning that the changes have come faster than he anticipated, most likely due to the initial successes to increase gender diversity within boards. The new report also proposed “a new voluntary 33% target for senior executive positions in FTSE100 companies” (reform report).

 

Although the reforms include new ideas and targets to improve gender diversity within corporations, in more recent years the employment rate of women in board roles has started to decline. According to the Independent, the progress for gender diversity within boards has stalled as in 2016 only 29% of people newly recruited to boards are female, down from 32.1% in 2014 (Chapman, 2017). Alternatively, the recruitment rate for women in Western Europe in 2016 was 35.4%, with France at 57%. For the UK to have any hope at reaching its targets, efforts must be made to increase the employment rate for women in boards, as if the rate is slowly falling below 33% then the new target set will never be reached. This means that the current actions taken by the government are not enough and the new proposals regarding gender diversity are failing. The French government, who’s country recorded 57% of new recruits in boards being female, are seeing fast levels of progress due to new laws. In 2011 the French government passed a new law stating that by 2017 40% of board members in CAC40 companies must be women. If companies cannot make the 40% level by 2017, then any changes in the board must satisfy the new law, meaning that new board recruits must be female until the 40% mark is reached (Zillman, 2016). This law forces companies to improve their gender representation in boards and the UK government may want to implement a similar strategy to improve its own gender diversity at a faster rate, with current proposals failing to do so. However, such a demanding law would go against the UK policy of flexible corporate governance implying that realistically a law like this would not pass.

 

In the report, the government also set out to create a new set of corporate governance frameworks for large private businesses. These private businesses are not forced to comply with the larger corporate governance standards that public companies have to follow and as a result this can lead a lack of transparency which can affect the stakeholders within the business. In the report, it is recommended that non-financial reporting should be a requirement for all businesses with a certain number of employees working for them, rather than just businesses that fulfil a certain legal form. I believe that this is a good idea because it allows large companies to be compared to each other, regardless of whether they are a public or a private business. This application of non-financial reporting can also lead to improvements in the aspects of environmental damage and also stakeholder rights, as inner problems with employees can be resolved using a more flexible version of a framework that has been proven to work. This increase in consistency of non-financial information reporting will also improve the corporate social responsibility of the private business, as before any reforms took place private companies did not view corporate social responsibility as a must- have need within the business. In fact, report by PwC in 2011 showed that 48% of private companies in Canada did not have a corporate social responsibility scheme in place (Maharaj, 2011), with this signifying the need for an introduction of reporting requirements. However, after these regulations have been established it should be much easier for private companies to set up schemes regarding corporate social responsibility, according to a study conducted by the University of Michigan. This says that private companies feel the short-term pressures of the market less than public companies do (Arbour, 2017), which makes it easier for these types of companies to dedicate more resources to non-financial motives. It also presents a conflict of interest with public companies, who’s main goal is to maximise profits for the shareholders. Money is ‘wasted’ on initiatives such as this in a public company, as Milton Friedman says himself, the main goal should always be to maximise profits.