City of London bosses warn against ‘gold plating’ new governance rules

Senior City of London executives have warned the UK government not to “gold plate” US-style corporate governance rules with procedures that could weaken boardrooms and add cost and complexity to company audits.

Ministers last week revealed long-awaited reforms to crack down on fraud and encourage greater boardroom responsibility after a string of corporate failures, as well as options to share audits for large companies between one of the Big Four accountancy firms and a small rival.

The FT’s City Network, a forum of more than 50 senior figures from the Square Mile, welcomed the move to improve corporate governance and audits but raised concerns about the unintended consequences.

Sir Win Bischoff, former chair of Lloyds Banking Group, warned against “gold plating” the Sarbanes-Oxley (Sox) regulation that has worked well in the US. These rules — which add greater director liability for fraud and accounting errors — are close to the new government proposals.

“What is proposed looks like going further in that effectively attestation is made by all board members with personal liability,” Bischoff said.

He added that the proposals risked creating more bureaucracy with the “danger of non executive directors immersing themselves in [unnecessary] management detail”.

Sir Mike Rake, former chair of BT and KPMG, said there was adequate reputational and financial liability for directors already. 

“Any significant increase will further put off qualified candidates who are critical to good governance and increase director insurance. Where these cases have gone to court they have in any event generally been judged on a proportional liability basis, which recognises that the non-executive directors do not run the company.”

Anne Richards, chief executive of Fidelity International, also worried that holding non-executive directors personally liable for accounts “risks putting off quality potential candidates who simply feel it is not worth the risk”.

She said: “The unintended consequence of this could be a reduction in overall quality and diversity of boards and a commensurate reduction in the overall quality of governance, oversight and insight. We want non-executive directors who are of high quality, not simply brave or foolhardy.”

Richards added that it was “extremely important that the line between executive and non-executive directors is not blurred”, which she said could lead to other corporate problems over time.

Miles Celic, chief executive of TheCityUK, agreed, saying: “We should be cautious about inadvertently discouraging the sorts of people we need to attract, especially those from under-represented parts of the population.”

Dame Alison Carnwath also said that there was nothing wrong with the Sox framework, adding that her two European boards had “Sox-lite programmes and these work well”.

But she worried about asking too much of non-executive directors (NEDs), saying that most of the work — such as accounting policies, compliance, internal audit and risk management — should fall to the audit committee of the board.

The “desirability of sitting on UK PLCs will continue to be affected by expecting all NEDs to have the necessary attributes to attest and assume that liability”, she added. 

“Leave the work with the audit committee and leave the attestation with the management who produce the accounts in the first place.”

Several in the network were unconvinced by government proposals around sharing large company audits between a Big Four firm and a smaller rival to encourage competition. 

Rake said that this move “risks adding cost, complexity and actually reducing the quality of audits particularly in large complex entities”. 

He added: “In many cases, given risk and regulatory requirements, the principal auditor may have to reaudit the elements carried out by another auditor. Is the real purpose of this proposal to improve quality or facilitate choice by creating competition? It’s very unlikely to achieve either.”

Carnwath said the idea of a second set of junior auditors seemed odd, pointing to her experience as an auditor to industrial company Lonrho, which was audited jointly by Peat Marwick and Mann Judd. “The criticism arose that the smaller firm’s revenues were too dependent on this large audit.”

Several of the Big Four firms would not want a shared audit given calculations over revenues earned per client and resource allocation, Carnwath added.

While acknowledging there was merit in having two sets of eyes, Richards said: “It is still extremely important that there is a clear single point of accountability on external audit.”

But Ann Cairns, executive vice-chair of Mastercard, said “more choice can only be a good thing”, adding that shared audits “sound like a good solution but of course the devil is in the detail”. 

She welcomed the proposal to restrict dividend payments for companies without the financial reserves to cover payouts. “In the corporate world today, very thinly capitalised companies can still pay dividends. This doesn’t make a lot of sense. Nobody wants our big companies to fail, sudden bankruptcy wreaks havoc.”