The usual shorthand to describe a government white paper that has taken ages to trundle down the runway is “long awaited”. The phrase doesn’t do justice to the slow progress of the business department’s consultation on audit and corporate governance reforms.
BHS failed in 2016 and Carillion in the first month of 2018. The three government-commissioned reviews of the audit industry, which provide the backbone of the proposals, landed in 2018 and 2019. Even the auditors, the focus of biggest shake-up, want to hurry up and are already putting in the place the required separation of auditing operations from consulting divisions.
In similar fashion, new bosses at the Financial Reporting Council, the audit watchdog correctly deemed too toothless for the modern world, are trying to turn the organisation into the Audit, Reporting and Governance Authority (ARGA), the new body due to have extra powers to police standards and competition. But “the critical missing piece”, as Sir John Kingman, author of one of the three reviews, puts it, has been the legislative follow-through.
The interesting question, therefore, is why it has taken so long for a white paper to appear. The answer probably isn’t the distractions of Brexit or the pandemic. Rather, it’s the behind-the-scenes resistance from corners of the corporate world to the idea that more responsibility for the quality and accuracy of company reporting should be pinned on directors.
Kwasi Kwarteng, the business secretary, has stuck to his guns with the headline-grabbing idea that directors’ contracts should include “malus and clawback” clauses so that bonuses can be retrieved when companies fail or scandals emerge. Good. Such clauses have been standard in banking since the 2008 crash and should not be controversial elsewhere.
The deeper corporate grumble has been about the potential for directors to be held to account for mistakes in company accounts. On that score, the consultation paper talks about giving ARGA “effective investigation and civil enforcement powers”, which may provoke more bleating from boardrooms about how risk-taking will be stifled.
Kwarteng needs to hold the line. When companies are tapping public markets for funding, directors should be on the hook if financial controls are inadequate or unaffordable dividends are distributed. Companies such as Carillion and Thomas Cook should not collapse like a pack of cards. The boardroom brigade should count their blessings: the proposed system looks several degrees softer than the Sarbanes-Oxley regime in the US.
Four months of consultation will follow, at which point the government finally needs to discover some urgency. If these really are the most important corporate and audit reforms for a generation, get on with it.
Water industry bust-up
A damp squib? Well, the biggest bust-up in the water industry in the 32 years since privatisation ended in low-key fashion on Wednesday. Nobody – not Ofwat, nor the four companies that had claimed the regulator was being too tough in its latest five-year “price control” regime – could claim outright victory.
Instead, the Competition and Markets Authority, adjudicator of the scrap, landed somewhere in the middle. On weighed average cost of capital, one of the prime drivers of returns for shareholders, the CMA opted for 3.2%.
That is more generous to the companies than the 2.96% which Ofwat, with an eye on customers’ bills, had judged to be enough. On the other hand, Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water were seeking as much as 3.6%.
Do the differences matter? Absolutely. Against a backdrop of lack of trust in the water sector (not helped by some absurd boardroom pay packets), this round of the five-yearly price cycle was the first in which Ofwat could credibly claim to be getting tough. Thus the whole regulatory system was under scrutiny. Appeals have been rare in the past three decades; four companies in one go was almost a mass revolt.
As things stand now, Ofwat’s credibility looks roughly intact. Back in September, when the CMA provisionally opted for 3.5%, that wasn’t the case. The eventual figure of 3.2% is easier to swallow.
But the position is hardly ideal. The four companies that appealed to the CMA have now secured slightly easier capital terms than the 13 that accepted Ofwat’s settlement at the outset and got on with life. Does that create an incentive for companies to run off to CMA to try their luck in future? We’ll have to wait another four years to find out, but that would be a bad long-term outcome.
