The significant reputational risk from irresponsible or unethical behaviour in the portfolio, coupled with the heightened expectations of investors as regards ESG, also provide strong incentives to respect the legal and regulatory framework. The regular fundraising process amplifies the level of accountability of the fund to its investor base on ESG issues – which Simon referred to as the "magnified incentive". Julie Bradshaw agreed, adding that potential litigation and reputational risks sharpen the focus of PE firms on good corporate governance and compliance, citing the example of the recent Goldman Sachs anti-cartel ruling.
Good governance makes business sense
Julie's perspective was that the focus on corporate governance among PE houses and investors is strong, and always has been, but is driven by good business sense and a desire to create long-term value with a view to a successful exit, rather than company law obligations. For example, PE investors typically reward employees of portfolio companies via incentive arrangements, and in some cases, have accepted co-determination, and promote good relationships with customers and suppliers, but not because they are compelled to do so by law.
Law reform proposals
Whilst Simon saw value in directors' statutory duties under Section 172 Companies Act in reinforcing the structural incentives mentioned above, the panel voiced doubts as to whether the various corporate governance law reform proposals currently being considered, particularly to enhance the rules around directors' duties to reflect corporate purpose, would achieve the desired changes in corporate behaviour.
Company law is a blunt instrument
Marc Moore observed that the law on directors' duties is of some, but relatively limited value in promoting good corporate governance, as it is rarely enforced and, other than the rules on directors' conflicts of interest, has little practical impact on corporate behaviour. There is an argument that Section 172 Companies Act has even had a detrimental effect on stakeholder capitalism by highlighting the pre-eminence of shareholder interests above those of stakeholders. Marc suggested that a more radical approach would be to introduce co-determination on company boards, with compulsory worker representatives, but the cultural barriers and unionised workforce in the UK make this a difficult proposition.
The effectiveness of reporting and disclosure obligations
The panel expressed mixed views on whether reporting and disclosure obligations drive genuine changes in corporate behaviour, although recognised that process reporting regimes such as the Modern Slavery Act and Gender Pay Gap reporting requirements have been particularly beneficial in bringing such issues to the boardroom agenda and as a tool for public accountability in these areas. There was also agreement that the "adequate procedures" defence in the UK Bribery Act has been an effective means of effecting behavioural change as it provides guidance on how to avoid liability and is therefore a sensible model for legislative measures. Michael Arnold commented that, in the US, corporate reporting and disclosure mechanisms have made a significant difference, in particular due to the enhanced litigation and reputational risks for those companies who fail to follow through on their public statements.
The role of corporate purpose reporting
The panel commented that corporate purpose reporting can be misused by companies wishing to report only positive measures whilst failing to disclose any deficiencies, but recognised the value in a requirement to formulate and articulate the company's purpose, by providing a focus for the board's decision-making and a means for shareholders to hold the board to account.
The US approach, and the rise of B Corps
Looking at the US perspective, Michael said there was little evidence to suggest that state company laws (such as constituency statutes, intended to give directors of US corporations the discretion to balance the interests of stakeholders and the need to maximise shareholder value) will significantly influence corporate behaviour, especially since the vast majority of companies are organized in a single state (Delaware). B Corps, by contrast, are a potentially relevant regulatory development, and have become more popular in Delaware since it became easier to opt into the B Corps structure in 2020 but he was sceptical that B Corps would become a significant force given that to date most are small companies.