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Is director and governance reform a good thing for high-growth and venture capital backed companies?

Among the changes are rules that would make directors of large companies liable should they collapse. Is personal liability for non-executive directors a good thing? 

Making directors personally liable for the collapse of companies is an unfortunate attempt to manage the fundamental risk of any corporate body that will have the unintended effect of making them more likely to collapse, or simply increasing insurance costs for the company itself.

The most successful company directors probably do not need to be company directors, and if they could lose it all from being involved in a company then that will simply mean they become shadow directors or opt out completely from the process

Even Dick Fuld, when CEO of Lehman, with all of his personal assets inside the firm, was not able to prevent the collapse of Lehman. Aligning both carrot and stick incentives can only go so far in compensating for the fundamental risks of any company management.

Under proposed legislation private companies will also come under scrutiny from audit watchdogs – so you think this reform is needed? Or is it a red tape distraction for founders? 

Companies with institutional funding (which often account for many of the biggest companies by value, rather than number, which is what matters) go through extremely extensive due diligence and audits from investors and third parties on a regular basis. Having been at the receiving end of these audits, one can not help be simultaneously both impressed and deterred by how thorough auditing already is. Additional legislation mandating that audits should have even more scrutiny will not be as effective as ensuring that good auditors are neglected and great auditors are sought out.

The concentration of audits amongst the big four and the scale required to audit large companies needs to be compensated for by investors being more willing to adopt emerging auditors of scale.

It is difficult to see how the audit legislation will be the panacea that it seeks to be and will simply be an additional bureaucratic burden on companies already struggling with the myriad problems of Brexit, Covid and other legislative burdens.

More Reading

Daily Telegraph – Sorrell leads attack on audit crackdown “WPP founder fears proposed changes could be ‘a case of bad timing’ that will strangle entrepreneurial endeavour and success”

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