News analysis
Britain is the ‘sick man of Europe’ because of governance
Britain’s corporate governance structure has been blasted for its lack of diversity and inclusivity.
Against the backdrop of a new UK, rid of European influence and able to forge its own destiny, mistakes are still widespread, one expert has said.
These mistakes are enough to make Britain’s corporate future unsustainable unless lawmakers, watchdogs and other stakeholders consider a complete reboot.
Without one, the UK will continue in a period of “economic malaise”.
What’s going on?
The UK is a victim of its own “deeply undemocratic corporate governance regime,” according to Matthew Lawrence, director and founder of the economic think tank Common Wealth.
In an opinion piece for The Times this week, Lawrence blasted the UK’s governance structures as favouring small groups established, wealthy stakeholders at the expense of others – particularly employees.
“We are well outside the mainstream in how we organise the company,” he wrote, highlighting that the UK ranked third world for employee participation rights in the latest European Participation Index.
“That outlier status is actively holding us back, from weak investment and chronic short-termism to damaging inequality.”
“Britain is again the sick man of Europe.”
What does he want?
A rewrite of the UK’s corporate governance rules aimed at decentralising and encouraging more long-term strategies over short-term profits.
Lawrence compared the UK to Scandinavian nations, which have a more robust culture of shareholder participation. This would encourage them to invest more time and effort into the company, particularly if they’re employees, he said.
Is he right?
Indices like the European Participation Index speak for themselves. The UK definitely has a distinct model for doing business, and compared to (often close) neighbours, it seems to favour minorities of stakeholders quite a bit more.
That said, shareholder participation has risen in the UK in the past year, according to the digital investment firm Interactive Investor, which handles almost £60 billion (€67 billion) in assets as of 2022.
Handled correctly, the increased noise of such participation is good because it feeds into the culture of involvement Lawrence describes, enabling stakeholders to have more influence and more personal investment in the business they’re attached to.
Will Britain’s corporate governance structure be rewritten?
There’s very little chance of that happening.
For one thing, Lawrence’s is just one of several opinions about handling governance rules in the UK. Each one has its supporters and its critics.
Last July, another commentator Brian Cheffins wrote a Financial Times piece calling for the country’s corporate governance code to be abolished altogether. That’s how wide the spectrum of professional opinion stretched.
In the piece, he claimed there was “no definitive evidence that better corporate governance yields better corporate performance” and said a more lassez-faire style system would be better.
Ultimately:
Governance rules will only be rewritten if the government of the day wishes it to happen.
Rishi Sunak’s agenda doesn’t focus on this. It merely concentrates on strengthening what the UK currently has. For example, his government has set out legislation for strengthening fraud prevention measures at the corporate governance level.
We do know, however, that some of the world’s foremost investors are interested in increased shareholder participation – enough to encourage it in companies they have a stake in.
This may do something for a culture shift in the long term, even if the UK’s official rulebook stays the same.