The government has said it will crack down on governance of corporate pension schemes. That’s good news, but we must make sure the deterrents are harsh enough, says Stephen Fallowell

Faith, Hope, and Charity trace their importance in Christian theology to Paul the Apostle in 1 Corinthians 13, who also pointed out that charity is the most important. Collectively, they are looked on as Christian virtues; traits or qualities which dispose one to conduct oneself in a morally good manner.

Jail prison

Similarly, Environmental, Social and Governance (ESG) has entered the lexicon of the investment world, with governance looked upon as the most important, because without good governance the other two elements would fail.

Recognising what good governance looks like or - as importantly - what bad governance looks like is not easy, particularly when companies are not transparent as to their structures and decision-making processes.

Failure to provide good governance leads to devastating consequences for employees”

The Association of Member Nominated Trustees in its ‘Red Line Voting’ instructions developed in accordance with the Financial Reporting Council’s Corporate Governance code, outlines actions that should be taken by stakeholders when company boards and/or Executives fail to apply good governance practice to the running of the company.

The vast majority of UK employers run their businesses responsibly, displaying high standards in corporate governance and fulfilling their responsibilities to their employees and their pension funds. However recent high-profile cases including British Homes Stores and Carillion, have demonstrated that failure to provide good governance leads to devastating consequences for employees, customers, stakeholders and pension schemes.

The government, in its recently published white paper on defined benefit funds, has stated that it is determined to ensure there is a corporate governance framework in place that works for both employers and employees. It has also said it wants to reduce further the risk of major company failures occurring through shortcomings of governance or stewardship.

There needs to be a sufficient deterrent, including imprisonment”

The stated intention is to strengthen the regulatory framework by giving the Pension Regulator powers to punitively fine anyone who deliberately puts their pension scheme at risk. However, it also plans to introduce legislation which would make it criminal offence to commit wilful or grossly reckless behaviour in relation to a pension scheme.

What form this legislation will take is open to debate, but there needs to be a sufficient deterrent, including imprisonment, to ensure those in positions of authority understand clearly the consequences of their actions.

This may sound draconian, but there is the inherent danger of treating cases of wilful poor governance as ‘white collar crime’ and merely dismissing the consequences as ‘financial losses’ without consideration of the impacts on the lives of those affected, which can be as devastating as bereavement.

The impacts on those affected can be as devastating as bereavement”

In February 2017, the Financial Reporting Council announced plans for a comprehensive review of the UK Corporate Governance Code. A public consultation, including a draft revised code, was issued in December 2017 and closed on 28 February 2018.

Fine words have been written seeking to balance the interests of all stakeholders in promoting the success of the company. However unless there is adherence to the code, balancing all interests, then we may be living in hope and faith rather than good governance.

Stephen Fallowell, Management Committee Member, Association of Member Nominated Trustees