A government-commissioned review of board evaluation in the UK listed sector in the wake of the Carillion scandal has recommended a code of practice to increase scrutiny of providers of external board performance.
The review into the effectiveness of independent board reviews by the Chartered Governance Institute found that there was no widespread market failure.
But the institute has recommended that the government bring in a voluntary code of conduct, focused on areas such as competence and capacity, independence and integrity, client engagements and client disclosure.
External board reviewers would be asked to commit publicly to the standards in the code by becoming signatories, alongside a set of good practice principles for listed companies when engaging an outside review.
The work was carried out at the request of the Department of Business, Energy and Industrial Strategy (Beis) in August 2018 following a series of corporate governance failures.
The rapid collapse in 2018 of Carillion, the construction and outsourcing group, in particular sparked questions about the role of the board and the accountability of directors and their external consultants.
Martin Callanan, minister for corporate responsibility, said the government was committed to learning lessons from previous company collapses.
“Robust, consistent evaluation of company boards will be crucial as we strive to make the UK the best place in the world to do business,” he said. “We will consider their recommendations carefully, and set out more details on next steps at a later date.”
The primary purpose of regular board performance reviews is to help the board improve its performance and the performance of the company, according to the institute.
It hopes that the code will encourage greater transparency about how external board reviewers conduct reviews and their qualifications, rather than prescribe or standardise how reviews are expected to be carried out.
Sara Drake, chief executive of the institute, said there was scope for broader adoption of good practice and greater transparency on the part of both board reviewers and the companies using their services.
Tom Gosling, executive fellow at the London Business School’s Centre for Corporate Governance, said the new code would be similar to that which governed remuneration consultants introduced in 2010, which “has proven very helpful in improving standards”.
He said that overall the approach seemed proportionate to the problem, with the likelihood of widespread adoption of the code and the risk otherwise of stricter regulation having unintended consequences and confusion.
Peter Swabey, policy and research director at the institute, said it was “not appropriate to be overly prescriptive” in the approach to governing external board evaluators.
“The support that is needed by one board may be very different from that needed by another. Excess prescription could deter innovation and competition,” he said.
But he added that it was “legitimate for shareholders and others to expect
greater accountability from both companies and reviewers as to how board reviews are conducted, and evidence that they are being undertaken robustly”.
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