Month: July 2024

In today’s everchanging business landscape, the role of directors goes beyond mere legal compliance and extends to embodying ethical leadership and fostering trust; in recent years, some high-profile corporate scandals and failures have dented public trust in businesses, highlighting the need for directors to be held accountable for their actions.

To this extent, the Institute of Directors (the “IoD”) has published a consultation document on a voluntary code of conduct (the “Code”) for directors: a practical framework designed to help directors navigate complex decisions and maintain public trust. The consultation document is open for feedback up until the middle of August 2024 and invites the public to offer input on matters such as, inter alia, whether there are additional issues that should be addressed and/or whether directors should make a public declaration of their adoption of the Code.

The Code applies to organisations of all sizes in private, public, and not-for-profit organisations. While directors are generally subject to duties by virtue of the Companies Act 2006 (see ss.171-176), their professional bodies, and/or their organisations, this Code seeks to complement the existing duties, rather than replace them. In other words, the Code is not a formal enforcement mechanism, rather, it establishes standards for directors’ conduct that go beyond legal requirements, aiming to enhance the credibility and reputation of directorship in society’s view.

This article delves into the six principles of the Code, exploring how they can catalyse positive change within businesses in the UK. These principles are inspired by the Seven Principles of Public Life (the Nolan Principles) published by the Committee on Standards in Public Life in 1995. This Committee advises the Prime Minister on arrangements for upholding ethical standards of conduct across public life in England. The Nolan Principles apply to anyone who works as a public officeholder, which includes all those who are elected or appointed to public office, both nationally and locally, including, inter alia, all those appointed to work in the Civil Service and local government.

Seeing as the principles are based on these Nolan Principles, the Code reflects certain provisions of other governance codes already in place in the UK, such as the UK Corporate Governance Code for companies with a premium listing on the London Stock Exchange, the Wates Principles for large private companies, the UK Sport/Sport England Code for Sports Governance for sports organisations in receipt of public funding, and the B Corp Legal Requirement for entities wishing to become certified B Corps.

Let us now delve into the six principles of the Code.

Principle 1: Leading by Example

A director is often, and rightly so, considered a model to look up to in a business. Therefore, this principle sets a benchmark for organisational behaviour and inspires professionals to adopt a culture of morale, corporate reputation, and respectfulness. Having a director who treats everyone with equal respect, strives for continuous self-improvement and considers the impact of his own behaviour on the work and mental health of his employees, ensures mutual trust, humility and empathy.

Principle 2: Integrity

The second principle entails the prioritisation of the organisation’s interests over personal gain, the management of conflicts of interest, and upholding high ethical standards. By ensuring the application of this principle, directors can foster a transparent and ethical corporate culture, strengthening stakeholder relationships and enhancing the organisation’s reputation. Integrity is considered crucial for building trust and respect within – and outside – the organisation and, as such, in the UK’s regulatory environment, integrity can form the differentiating factor of a business in a competitive market.

Principle 3: Transparency

Transparency implies that directors are open about decisions and actions affecting objectivity of the business, that they address mistakes openly, encourage reporting misconduct and communicate clearly with other professionals in the organisation. This way, business operations can be conducted with trust and confidence while also fostering a culture of honesty and accountability. In the UK, where regulatory scrutiny and public expectations are high, transparency can mitigate reputational risk.

Principle 4: Accountability

This principle entails complying with legal duties and taking personal responsibility for actions. Moreover, it implies being open to feedback, holding management accountable, seeking independent advice and reflecting on one’s personal capabilities. This ensures that directors answer to their own decisions and actions which, in turn, reinforces trust and confidence among professionals and improves the quality of decision-making. Ensuring that this principle is implemented amongst directors in the UK can enhance governance frameworks and promote sustainable success.

Principle 5: Fairness

This comprises, inter alia, making decisions impartially and based on merit, respecting interests of all stakeholders, promoting equality of opportunity and fair treatment and encouraging diversity. Making sure that decision-making is governed also by the principle of fairness, enhances loyalty and confidence among professionals. It promotes an inclusive environment in which all employees feel valued and respected. Embracing fairness can enhance workplace diversity and inclusion while driving innovation and better business outcomes.

Principle 6: Responsible Business

Directors should consider the broader impact of their decisions on society and the environment, prioritise long-term goals over short-term financial gains, promote high standards across the supply chain and reject questionable practices. These broader societal and environmental outcomes foster trust and confidence in directors’ leadership and support a more sustainable and equitable business landscape. Generally, this principle enhances corporate reputation and supports UK’s commitment to ethical business practices.

Overall, the IoD’s Code provides a robust framework to enhance ethical standards and governance in UK businesses.

It may be argued, however, that the necessity of the Code is debatable, given that directors are already bound by comprehensive duties outlined in the Companies Act 2006. This existing framework covers a wide range of responsibilities, and additional guidelines may be viewed as redundant and burdensome, especially for smaller organisations with limited resources. Concerns have also been raised about the effectiveness of a voluntary code with no enforcement mechanism or register of signatories, as observed for instance by ICAEW, whose members are already subject to the ICAEW’s code of ethics.

Small businesses are the backbone of any economy: they drive innovation, create jobs and foster community growth. At the start of 2023, the UK counted 5.1 million small businesses consisting of fewer than 50 employees. While the private sector business population increased by 0.8% compared to 2022, small businesses still face significant cash flow challenges which hinder their growth and sustainability. Therefore, it goes without saying that addressing these issues is crucial for economic stability and prosperity and, as such, the importance of small businesses is being reflected in the variety of proposals set forth by the Conservative Party, the Labour Party and the Liberal Democrats. This article seeks to delineate these major proposals in the UK.

The Conservative Party

The Conservative Party proposes to improve the enforcement of the Prompt Payment Code (PPC). The PPC is a voluntary code of practice for businesses, established in December 2008, which sets general standards for payment practices between, on the one hand, organisations of any size and, on the other, their suppliers. The PPC seeks to tackle late and unfair payment practices in both public and private sectors by implementing payment to suppliers on time, giving guidance to suppliers on terms, dispute resolution, and prompt notification of late payment, and supporting good practice throughout the supply chain by encouraging its adoption to mitigate the risk of insolvency.

They also propose a shift towards digital invoicing to modernise small businesses practices and enhance resilience and adaptability in an ever-changing economic landscape. This proposal encourages the reduction of administrative burdens on small businesses, with the aim of enhancing their operational efficiency and allowing them to focus on growth and innovation.

The manifesto includes several other pro-small business measures, such as cuts to Business Rates (i.e., taxes paid by businesses on their property) and amendments to the Jobs Tax. In practice, these cuts seek to support job creation and ease financial pressures on small businesses.

The Conservative Party also focuses on improving skills. This includes providing extra funding for adult requalification and retraining to help existing workers expand their skills, especially in digital areas, while also improving the apprenticeship funding system.

The Liberal Democrats

The Liberal Democrats’ manifesto for small businesses delineates various key proposals to support and strengthen the sector, one of which being also centred on the importance of rigorously enforcing the PPC. Such enforcement would ensure that all government agencies, contractors, and companies with more than 250 employees, sign up to the PPC.

Additionally, the Liberal Democrats seek to support local banking by collaborating with major banks to create a local banking sector dedicated to small and medium-sized enterprises to strengthen the financial infrastructures supporting such businesses.

Moreover, the Liberal Democrats propose to cut Business Rates for small businesses. One of the proposals is that of a Commercial Landowner Levy (CLL): a tax reform which, unlike Business Rates, would be based on the value of the land itself rather than the rental value of the property. This would mean that the tax would be levied on the landowners rather than the business occupying the property. Clearly, implementing this type of system would require an in-depth analysis of land which, in turn, would impose significant administrative burdens.

Additionally, the Liberal Democrats plan to enhance access to finance for small businesses by encouraging more investment in small businesses through government-backed schemes and incentives. Their manifesto also highlights the importance of boosting small business exports to help such businesses enter international markets.

Lastly, the Liberal Democrats also emphasise the need to invest in skills and training. They propose to establish new training programmes and support for apprenticeships to ensure that small businesses have access to a skilled workforce. This initiative aims to address the well reported skills shortages in the UK and enhance the productivity and competitiveness of small businesses.

The Labour Party

The Labour Party pledges to acknowledge and improve cash flow issues faced by small businesses by imposing a requirement on large businesses to report on their payment practices. This additional transparency measure aims to expose – and mitigate – late payments, thereby enhancing cash flow to such businesses. By enforcing disclosure of payment practices and ensuring timely payments, the Labour Party primarily seeks to enhance accountability of large companies, ensuring that small businesses receive timely payments which are, in turn, crucial for their financial health and stability, considering the chronic cash flow issues they continuously face.

Additionally, the Labour Party emphasises the need to modernise business practices and adopt new technology. This initiative mirrors the Conservative Party’s stance and highlights a bipartisan recognition of the need for small businesses to stay abreast of the rapidly evolving economic landscape.

Another cornerstone of the Labour Party’s manifesto is the promise to replace the current Business Rate systems with a more equitable system. The Labour Party has stated that it seeks to find a “system that works better, because at the moment, there’s not a level playing field between businesses that are online and those that are sort of bricks and mortar” (i.e., the traditional physical stores). In other words, physical stores often face higher costs due to Business Rates, while online businesses may not be taxed as heavily.

Another proposal is that of establishing a local banking sector to improve access to finance for smaller businesses by accelerating the rollout of bank hubs; bank hubs are shared banking facilities that offer services from multiple banks under one roof, providing essential banking services like cash deposits, withdrawals, and basic financial advice. Therefore, this initiative is designed to ensure that small businesses and local communities have convenient and accessible banking services, especially in areas where traditional bank branches may have closed.

Moreover, in seeking to support small businesses, the Labour Party promises to revitalise Britain’s high streets: they plan to tackle anti-social behaviour by introducing new police patrols in town centres. This initiative is designed to make shopping areas safer and more welcoming, encouraging more foot traffic and, in turn, boosting sales for local businesses.

In addition, the Labour Party seeks to give small businesses a better chance to win public contracts by opening up competition. This means that smaller enterprises will have fairer access to lucrative government procurement contracts, which were often dominated by larger corporations.

The Labour Party also aims to boost small business exports, similarly to the Liberal Democrats’ manifesto. This involves providing clear advice and publishing a comprehensive trade strategy to help small businesses enter international markets.

The creation of Skills England (mirroring the Liberal Democrats’ proposal to invest in skills and training) is intended to address skills shortages by working with local industries to ensure that the workforce has the necessary skills. This initiative includes the establishment of new Technical Excellence Colleges, which will offer specialised training aligned with industry needs. By developing a skilled workforce, small businesses can find the talent they require to innovate and grow.

Finally, positioning Britain as a Clean Energy Superpower is another key facet of the Labour Party’s plan. This involves cutting energy bills for small businesses and creating new opportunities for tradespeople in the green energy sector.

While each strategy is different, each of the Parties recognise the urgent need to address the issues which small businesses face in the UK.

These comprehensive measures are designed to create a supportive and dynamic environment for small businesses, ensuring they have the (financial) resources, opportunities, and infrastructure needed to thrive in a competitive marketplace. Overall, all Parties are promising to take steps to ameliorate the economic field by making it an environment in which small businesses can grow and thrive.