Corporate governance reforms aim to prevent another Carillion or BHS
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The government is proposing to ban large companies on the brink of insolvency to pay dividends and bonuses to executives.
The changes, set out in a consultation published on Thursday, could potentially improve the chances of defined benefit pension funds where a sponsoring employer collapses.
"Large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency. Directors would also publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change," the Department for Business, Energy & Industrial Strategy has said.
"Large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency. Directors would also publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change," the Department for Business, Energy & Industrial Strategy has said.
Payment of dividend must not threaten solvency over two years
Among others, directors would need to state that any proposed dividend is within known distributable reserves and that payment of the dividend will not, in the directors’ reasonable expectation, threaten the solvency of the company over the next two years, if the reforms are brought in.
Companies could be expected to write into directors’ contracts that their bonuses will be repaid in the event of collapses or serious director failings up to two years after the pay award is made.
Business secretary Kwasi Kwarteng said: "When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms."
However, the beneficiaries of dividends include investors like pension funds, and the consultation notes that "government is aware of the importance of dividends to pension funds and savers and to the efficient re-allocation of surplus capital to other parts of the economy. It is therefore keen understand any potential adverse effects and to avoid measures which will unnecessarily reduce the level of dividends paid by UK companies."
An attempt to improve audit quality
The reforms also aim to break up the dominance of the 'big four' accountancy firms by demanding that companies use smaller 'challenger' firms for parts of their audit, with the creation of a new regulator. Audits will be extended to include companies' performance against climate change targets.
Minister for corporate responsibility Lord Callanan said: "Audit failure isn’t an abstract problem, it has real life consequences. Thousands of jobs have been lost in the wake of collapses like Carillion, and many more lives impacted, while wider confidence in big business is undermined."
The consultation runs until 8 July at 11:45pm.
