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Government opens debate on corporate governance

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Vince Cable, the Business Secretary, took the opportunity of his address to the CBI annual conference to launch a review of the way the UK companies are run.

Announcing the review, entitled A Long Term Focus for Corporate Britain, Mr Cable set out a series of areas that will be covered in the study.

These include short-termism, investor engagement, directors’ pay and the take-over process.

The remit of the review poses a number of specific issues. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively? What are the implications of the changing nature of UK share ownership for corporate governance and capital markets? Should the disclosure of directors’ pay be more transparent? And do shareholders and investors focus too much on the short-term?

In his speech to the CBI conference, Mr Cable questioned whether shareholders in one company should be consulted before their board buys another company: “On takeovers, I have concerns that too many are driven by short-term financial incentives”.

Mr Cable said that the consultation on corporate reform “should produce a rounded account of the issues that may be causing a dislocation between what is best for owners and what is best for managers”.

Mr Cable also addressed the matter of directors’ remuneration, asking why pay packages have risen so sharply over the past 10 years, and whether greater transparency in pay would be beneficial.

On the actual scope of the review, the Business Secretary described the UK as leading the world in developing high standards of corporate governance, with the first stewardship rules for investors, the first corporate governance framework for companies and the most comprehensive takeover code.

But he added: “Now is the time to look to the future and take a wider view on how these can work together. Well functioning capital markets are vital to productivity, growth and the future prosperity of the UK.

“We need to ask ourselves what are the factors influencing short-term decisions, the reasons for the growth of directors’ pay and why economically damaging takeovers still take place? I recognise that the best solutions will come from businesses and that regulation is not the only option. That is why I am calling on all companies and individuals to put forward their ideas.”

Responding to the announcement of the consultation, Richard Lambert, the CBI’s director-general, said: “We look forward to contributing to the review on corporate governance, and firmly believe that a range of tax and regulatory instruments are needed to incentivise long-term investment in British business.”

Steve Radley, director of policy and external affairs at EEF, the manufacturers’ organisation, welcomed the concentration on longer term strategies.

He commented: “This review will be a real step forward if it helps to create the right for companies to invest for the longer -term and, for our small and medium sized firms to grow into the world leaders of the future.

“With the government set to play a smaller role, we need to address our lack of large companies who we will increasingly rely on to invest in skills, innovation and our infrastructure to drive the recovery forward.”

But Dr Roger Barker, head of corporate governance at the Institute of Directors, expressed caution about the remit of the review, arguing that many of the areas under scrutiny have already been the subject of analysis.

He said: “The IoD is supportive of attempts to reduce short-termism in the UK economy. In particular, the role that institutional investors may play in encouraging short-termism in UK public companies is worthy of renewed scrutiny.

“However, this is an extremely wide-ranging review. It pulls together a number of issues that have already been considered in detail by earlier official investigations into corporate governance. It is yet to be seen whether this latest review can add much to this earlier work.”

The consultation will run for 12 weeks until 14 January 2011.

Details can be found at