BEIS publishes response to consultation on corporate governance and insolvency

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On 26 August 2018 the Department for Business, Energy & Industrial Strategy (BEIS) published the government’s response to its consultation seeking views on proposals to improve the corporate governance of companies that are in or are approaching insolvency.

In March 2018 the government launched a consultation which looked at ways to reduce the risk of major company failures occurring through shortcomings of governance or stewardship, and to strengthen the responsibilities of directors of companies which are in or are approaching insolvency. The consultation also explored options to improve the government’s investigatory powers when things go wrong.

The government plans to take forward the following specific actions:

  • Strengthen transparency requirements around group structures. It wishes to ensure that adequate and effective controls are in place to ensure that directors are fully aware of any risks posed by subsidiaries to the overall group. Options could include working with industry to improve guidance, or introducing a requirement for corporate groups of a significant size to provide an organogram of their corporate structures along with an explanation of how corporate governance is maintained through the group.
  • Strengthen shareholder stewardship. In conjunction with the investment community, the Financial Reporting Council and others, the government plans to identify means to incorporate stewardship within the mandates of asset managers and to establish channels for institutional investors to escalate concerns about the management of a company by its directors.
  • Strengthen the framework on dividend payments. It has asked the Investment Association to report on the prevalence of the practice of companies avoiding an annual shareholder vote on dividends by only declaring interim dividends. The government confirmed it will take steps to ensure shareholders have an annual say on dividends if the practice is widespread. It also plans to explore whether a comprehensive review of the dividend regime is required. The government agreed with respondents’ views that there should be no automatic bar on companies paying dividends in circumstances where a company’s pension scheme is in significant deficit.
  • Bring forward proposals to improve board effectiveness and strengthen directors’ training and guidance. The Institute of Chartered Secretaries and Administrators (ISCA) will be invited to convene a group of representatives of the investment community and companies to identify ways of improving the quality and effectiveness of board evaluations, including developing a code of practice for external board evaluations.
  • Sales of businesses in distress. Take forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress. The government will work with industry to develop guidance on the steps that a director should take when considering the sale of an insolvent subsidiary.
  • Value extraction schemes. Legislate to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes designed to remove value from a firm at the expense of creditors when a company is in financial distress.
  • Dissolved companies. Amendments will be made to the Company Director Disqualification Act 1986 to extend the Insolvency Service’s powers to investigate former directors of dissolved companies where they are suspected of acting in breach of their legal obligations.

WM comment

BEIS stated that these measures will be set out in further detail in the autumn. We will keep you up to date with any developments.