IoD consultation on code of conduct for directors – a (discreet) step in the right direction?

Posted: 18/07/2024

The Institute of Directors (IoD) has published for consultation a voluntary code of conduct for directors of UK businesses. The code is intended to provide a framework for directors to make informed decisions, prioritise the interests of their organisations, and balance financial performance with societal impact.

The case for a code of conduct

In recent years, corporate scandals and failures have dented public trust in businesses. The collapse of Carillion, P&O Ferries and BHS, along with scrutiny of the Post Office (among others), has highlighted the need for directors to be held accountable for their actions. While the IoD acknowledges the range of directors’ duties already in place, it notes that the lack of a directors’ code of conduct is a significant gap in the UK's corporate governance framework. Its proposal seeks to address this by providing a set of principles and undertakings that directors can voluntarily adopt to demonstrate their commitment to high ethical standards.

Key principles

The code is structured around six key principles and corresponding undertakings, which are designed to guide directors in their decision-making processes and ensure that they prioritise the interests of their organisations and stakeholders. These are:

• Leading by example – showing exemplary behaviour in personal conduct and decision-making.
• Integrity – acting honestly, adhering to relevant laws and regulations, and upholding strong ethical values.
• Transparency – ensuring openness in decision-making along with providing accurate, timely, and consistent information to stakeholders.
• Accountability – taking responsibility for actions and their outcomes.
• Fairness – treating all stakeholders equitably.
• Responsible business - integrating ethical and sustainable practices, aiming for long-term business success.

Consultation

The IoD is seeking views on the code from directors and the wider public on the following areas in particular:

• Are there any additional matters that should be addressed in the code?
• How can awareness of the code be encouraged amongst directors and the wider public?
• Should the government, regulators or professional bodies have a role in encouraging adoption of the code?
• Should directors publicly confirm their adoption of the code?
• Would existing directors commit to the principles and undertakings in the code?

The consultation closes on 16 August 2024.

Commentary

While the IoD notes that businesses which adopt the code will benefit from improved governance, enhanced reputation, and better decision-making processes, some concerns have been raised about the effectiveness of a voluntary initiative, amid a proliferation of industry and sector-specific governance codes (along with those already in place for public companies). Likewise, the IoD’s approach can be contrasted, for example, with the Better Business Coalition lobbying for the statutory amendment of section 172 of the Companies Act 2006 (duty to promote the success of the company), which would legally require directors to take a broader view of stakeholder issues, alongside commercial objectives and profits.

However, the IoD believes that a voluntary code would be more effective in promoting a culture of accountability, as it would be adopted by directors who are committed to upholding high standards of behaviour. In turn, stakeholders, including investors, customers, and employees, would have greater confidence in the organisations they interact with.

As it stands, if the code is adopted in its current form, it remains to be seen what its practical impact will be, amid unprecedented scrutiny regarding the way in which businesses govern themselves and the matrix of growing challenges faced by directors.

Our specialists advise across the full spectrum of governance-related risks and compliance matters and are well-equipped to help businesses and directors proactively manage these issues. Please contact us for further information.

Return to news headlines