UK Institute of Directors calls for a director Code of Conduct following corporate scandals

3 minute read  21.06.2022 Kate Hilder, Siobhan Doherty

The UK Institute of Directors (IoD) has called on the UK government to commission the development of a voluntary Code of Conduct or Code of Ethics for directors to lift standards of director behaviour in the wake of recent corporate scandals and rebuild public trust in business.  We summarise the key points of the proposal.


Key takeouts


  • The introduction of a a voluntary, industry-led Director Code of Conduct/Code of Ethics is being put forward by the Institute of Directors (IoD) as a means of restoring trust in business by raising standards of conduct in line with community expectations and encouraging industry to take the lead on the issue, while avoiding adding to the regulatory/compliance burden on directors.  

 

 

  • The IoD envisions that the proposed Code would 'incorporate modern thinking relating to issues such as climate change, diversity and business purpose as well as more traditional expectations around competence, lawfulness, independence and confidentiality'
  • The IoD has called on the UK government to commission an expert working group to develop and draft the Code,  

In a move aimed at restoring and building trust in UK business and more particularly in UK business leaders, the UK Institute of Directors (IoD) has released a policy paper outlining its proposal for the introduction of a principles-based voluntary Director Code of Conduct.  

It's envisioned that once developed, all UK directors would be encouraged to voluntarily commit to the principles of conduct/behaviour set by the Code and submit to Code accountability procedures/mechanisms.  

Importantly, it's intended that the proposed Code, would be distinct from, and complement rather than supersede existing requirements including those under the existing Corporate Governance Code and directors' fiduciary requirements.  

The IoD has called on the UK government to support the initiative by commissioning an expert working group to develop an initial draft of the Code and to generally support the IoD's proposal.  

Below is a high level summary of the key points of the proposal.  

The case for introducing a Director Code of Conduct 

The IoD suggests that calls for directors to be held more accountable to the wider community in the wake of recent corporate scandals have potential to trigger the introduction of additional (and in the IoD's view undesirable) 'prescriptive regulatory obligations' on directors.

The IoD is putting forward the introduction of a voluntary Code of Conduct or Code of Ethics for directors as an alternative and potentially more effective response.  The IoD argues that a voluntary Code would be a means for the government to demonstrate its commitment to increasing director accountability/demonstrating commitment to raising standards of conduct and of encouraging the business community to 'take the lead on addressing societal concerns relating to business behaviour', while also avoiding adding to the regulatory/compliance burden on directors and the associated negative consequences.  The IoD comments that:

'a heavily regulated regime for directors runs the risk of inducing a counterproductive focus on compliance which detracts from the capacity of boards to be strategic and innovative.  This paper proposes an alternative, more flexible approach which emphasises individual responsibility and the importance of a business-led solution'.

The IoD also points to the fact that the introduction of a Code of Conduct is commonplace in other professions in the UK (eg accounting and legal professions) and that Codes of conduct for directors are in place in other jurisdictions (eg South Africa, Singapore and Hong Kong).  

The policy paper further observes that in the UK, a Code of Conduct for directors is also not unknown.  The IoD introduced a Code of Professional Conduct for Directors in 1998 that was initially applicable to all IoD members as a condition of their membership.  This requirement has since been scaled back to apply to a much smaller group of highly qualified IoD members (ie members who have completed the Chartered Director Qualification).  

As such, the IoD considers that a Code for UK directors is a 'missing element' in the existing accountability framework, and one which has the strong support of the director community.  According to the IoD, a May 2022 survey of IoD members found that 78% of respondents agreed that directors should be subject to a Code of conduct on a voluntary or mandatory basis.

The policy paper states: 

'The IoD believes that now is the time to re-fashion a 21st century Code of Conduct for directors, which applies to all UK directors.  Such a Code will incorporate modern thinking relating to issues such as climate change, diversity and business purpose as well as more traditional expectations around competence, lawfulness, independence and confidentiality'.

Proposed scope and content?

The IoD envisions that the Code, including appropriate accountability mechanisms, would be drafted by an expert working group made up of leading directors, governance experts and representatives from relevant stakeholder groups (eg institutional investors, regulators and academics).  The initial draft would then (potentially) be released for public consultation prior to being finalised.  As such, the policy paper does not include or propose a 'draft Code'.  

However, for illustrative purposes and as a 'starting point' for discussion, the Appendix to the policy paper includes suggested text, adapted from the IoD's existing Chartered Director Code of Professional Conduct (which as flagged applies to a subset of IoD members).  This is structured around nine key principles, and supporting high level commitments. 

To give a sense of the scope/level of specificity included, we've provided a brief snapshot of the nine principles and supporting commitments below.

1.  Directorship: Commitments under this principle include (among others) a commitment from directors to understand their legal duties as a director and to ensure that their organisation complies with its legal obligations as well as commitments to devote sufficient time/attention to the role.  The IoD also lists a commitment to 'maintain the financial viability of my organisation and, if that is no longer possible, take appropriate action to protect the interests of creditors'. 

2.  Integrity: Commitments under this principle include (among others) commitments to challenge other board members (including the Chair) as well as management and to 'recognise that resignation or dismissal from the board may sometimes be the ultimate consequence of sustained disagreement on a matter of conscience or judgement'.  

3.  Responsible Business: Commitments under this principle include (among others):

  • a commitment to 'encourage the board to define a business purpose' and to take into account the social and environmental impact of decisions
  • specifically climate-related commitments such as 'insisting' that the organisation reduce its carbon footprint 'over a reasonable timeframe' and having a 'clear understanding' of the organisation's approach to climate change and environmental impact
  • human-capital management related commitments such as exercising 'due diligence' over working conditions across the supply chain and 'striving' to eliminate labour exploitation and/or modern slavery practices

4.  Inclusion and Diversity: Commitments listed under this principle include committing to 'promote' an 'inclusive approach to board composition and business practice'; to advocate for the benefits of diversity and inclusion; and to avoid serving on boards that do not value diversity/inclusion. 

5.  Shareholders: Commitments under this principle include committing to: a) ensure all shareholders are 'treated fairly',; b) understanding shareholder expectations and 'endeavouring' to take these into account in decision making; c) engaging with shareholders on 'matters of importance' and d) avoiding 'prioritising the short term financial interests of shareholders over the interests of other stakeholders'. 

6.  Stakeholders: Commitments under this principle include: having regard to the interests of all stakeholders 'with a legitimate interest in the success of the organisation' and building goodwill and 'strong lines of communication' with relevant stakeholders.  

7.  Confidentiality: Directors would commit to both: a) not disclosing confidential information (unless authorised by the board/required by law); and b) not making 'improper use of information' acquired in their role as 

8.  Continuing Professional Development: Directors would commit to continually improving their skills through continuing professional education and consider undertaking a formal qualification as a director.

9.  Personal Conduct: Its suggested directors commit treating others (colleagues, employees and other stakeholders) with 'respect, dignity and consideration' and to avoiding engaging in behaviour which might affect the reputation of the organisation/contradict its values.   

Accountability mechanisms?

The suggested text does not include suggestions around what accountability mechanisms/procedures might be included in the Code.   The IoD comments that an 'appropriate investigations and sanctions process would…need to be defined' (by the expert working group as part of the drafting process).  The proposal does suggest that a whistleblower process could be established to enable reporting of poor conduct.

The IoD also suggests that the names of Code signatories would be published on a public register.  Code signatories could also be 'encouraged' to disclose the fact in their organisation's annual report.  

Administration and oversight

As flagged, the IoD envisions that the voluntary Code (including appropriate accountability mechanisms/processes) would be drafted by an expert working group to be commissioned by the government.  

Once finalised, the IoD proposes that the Code would be operated by the business community (rather than by the government or a regulator).  
However, it's hoped that government, regulators, institutional investors and other stakeholders would 'endorse the Code, and advocate (but not oblige) the participation of UK directors'.

In his letter calling on the government to support the initiative, IoD Director General Jonathan Geldart states:

'We hope that the government will lend its support to this initiative. Although a Code of conduct is not a silver bullet, we believe that it can play a meaningful role in improving trust in the UK business community'.

[Sources: IoD policy paper: A voluntary Code of Conduct for directors A proposal for the UK government; Letter to the Business Secretary: Rt Hon Kwasi Kwarteng MP, 14/06/2022]

Interested in this (and similar) topics?  

You can subscribe to our weekly wrap up of key governance, risk, regulatory and ESG developmentskey governance, risk, regulatory and ESG developmentskey governance, risk, regulatory and ESG developments

Contact

Tags

eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuYW1laWQiOiJjZjA0NDgzYS05NWYxLTRjMjAtOGQ1NS1hYTQ2YTU2YWY5NWYiLCJyb2xlIjoiQXBpVXNlciIsIm5iZiI6MTczOTcwNzUzOCwiZXhwIjoxNzM5NzA4NzM4LCJpYXQiOjE3Mzk3MDc1MzgsImlzcyI6Imh0dHBzOi8vd3d3Lm1pbnRlcmVsbGlzb24uY29tL2FydGljbGVzL3VrLWluc3RpdHV0ZS1vZi1kaXJlY3RvcnMtY2FsbHMtZm9yLWRpcmVjdG9yLWNvZGUtb2YtY29uZHVjdCIsImF1ZCI6Imh0dHBzOi8vd3d3Lm1pbnRlcmVsbGlzb24uY29tL2FydGljbGVzL3VrLWluc3RpdHV0ZS1vZi1kaXJlY3RvcnMtY2FsbHMtZm9yLWRpcmVjdG9yLWNvZGUtb2YtY29uZHVjdCJ9.X8S5zvBUyREtuG8Hv4YQ-1Y-NsbmfOx_P9vA7fDmTUY
https://www.minterellison.com/articles/uk-institute-of-directors-calls-for-director-code-of-conduct

Point of View: insights into key issues and challenges facing business today.

In this series of interviews with MinterEllison partners we hear their perspective on key areas of interest to our clients and the business community.