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E-MailMartin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.
The Financial Reporting Council today [July 16, 2018] issued a revised corporate governance code and announced that a revised investor stewardship code will be issued before year-end. The code and related materials are available at www.frc.org.uk.
The revised code contains two provisions that will be of great interest. They will undoubtedly be relied upon in efforts to update the various U.S. corporate governance codes. They will also be used to further the efforts to expand the sustainability and stakeholder concerns of U.S. boards.
First, the introduction to the code makes note that shareholder primacy needs to be moderated and that the concept of the “purpose” of the corporation, as long put forth in the U.K. by Colin Mayer and recently popularized in the U.S. by Larry Fink in his 2018 letter to CEO’s, is the guiding principle for the revised code:
Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.
Second, the code provides that the board is responsible for policies and practices which reinforce a healthy culture and that the board should engage:
with the workforce through one, or a combination, of a director appointed from the workforce, a formal workforce advisory panel and a designated non-executive director, or other arrangements which meet the circumstances of the company and the workforce.
It will be interesting to see how this provision will be implemented and whether it gains any traction in the U.S.
4 Comments
Perhaps of at least equal significant is that the new UK Corporate Governance Code finally shines a light on the importance of value preservation in the delivery of long-term sustainable value. In relation to creating an appropriate corporate culture Boards are now being specifically asked to assess how they preserve value over the long-term. Provision No.1 of the new code states: “The board should assess the basis on which the company generates and preserves value over the long-term.” This change is likely to have a significant impact in the Boardroom.
The UK Corporate Governance Code (as revised) will help US companies, from small to large, to focus on what it means to be global.
Who can quarrel with the virtues of sustainability and long term corporate focus? Actually, anyone familiar with the scope of issues generally labeled as ESG and the even broader scope of the UN’s Millenium Goals that travel on the back of ESG initiatives. Those agendas are on balance more pernicious than supportive of long term shareholder value.
As to objectives beyond shareholder value, they have never been established as pertinent to US corporate governance law. Those who believe they should be ought to seek legislative action rather than attempting to control commercial behavior through changes to corporate reporting requirements.
for sure a code with a sound substance and having the purpose to be promote inclusive and long term Corporate governance. As i am a French professor ad expert on these issues it is a real temptation to compare it with the new code AFEP MEDEF in France (june 2018) and to regret the lack of ambition of this later, which is not a “code de place”. For sure few improvements were made about “perennial approach” but we are far from this inspiring model. Therefore as usual The Law will intervene to move on as soft law is not sufficient.