Directors’ code of conduct unveiled after Carillion ‘shortcomings’

A new voluntary code of conduct for directors has been unveiled, partially in response to the collapse of Carillion, Construction News can reveal.

The code of conduct, developed by the Institute of Directors (IoD), aims to “build trust in business” after high-profile corporate failings have shaken public confidence in business leaders. The IoD, a membership body of business leaders, hopes the code could be used as a benchmark in court cases involving directors.

In an exclusive interview, IoD director of policy and corporate governance Roger Barker told CN that major corporate crises including Carillion’s collapse “exert a very negative impact on the public’s perception of people in business leadership positions”.

Carillion was the second biggest construction contractor when it collapsed in 2018, shocking the construction sector and plunging local authorities and subcontractors across the UK into financial peril.

“Our perception is that most directors out there operate with commendable standards of ethics and conduct, both in terms of the decisions they make and in terms of their personal conduct from the way they set an example for others,” Barker said.

But he warned that “horror stories” and “scandals” like that of Carillion, the more recent scandal involving the Post Office and the collapse of department store firm BHS in 2016, hit public confidence in business directors and damaged sectors including the construction industry.

He also said further major business failings could lead to the “worst-case scenario”, that would see directors have their ability to make judgements “chipped away and eroded” by new laws. The code of conduct is an attempt to stop major business failings from happening again.

The new code, which has been put out to consultation in the business community and wider public, focuses on six main principles of director conduct.

These are: leading by example, integrity, transparency, accountability, fairness, and responsible business.

“Carillion is undoubtedly one of the biggest corporate scandals and collapses of the past decade,” he said. “I think it’s had a huge impact on people’s perception of how governance is working in the UK.

“It highlighted some shortcomings that can occur within our system if directors don’t do the right thing and business leaders don’t do the right thing.”

Last year, former Carillion chief executive Richard Howson was banned from being a director for eight years, shortly after the Financial Conduct Authority (FCA) fined him £397,800 for his role in “recklessly” publishing misleading accounts.

The FCA said it would have fined Carillion £37.8m had it not been in liquidation, and issued fines to two other former directors.

Barker sees the code as a “yardstick of behaviour” and a tool to “improve the culture of business” for corporations of all sizes.

Though he does not envisage it being incorporated into law, Barker suggested the code could be used as a “benchmark in legal proceedings” concerning directors.

“Often you have a situation in litigation where the court wants to establish what is reasonable conduct, or what are the accepted best practices at work,” he said, adding that regulators and lawyers could use the code to establish what best practices could look like.

Barker also hopes the incoming government will encourage businesses to adopt the code.

While he hopes the recommendations will be picked up by businesses of all sizes, he emphasised to CN that the institute did not want to create a “bureaucratic obstacle for directors” on top of the regulations and rules they already need to keep to.

Instead, he sees it as a “tool” to help navigate complex leadership decisions.

“It will become a tool, something which helps directors reflect on where they are in the midst of often quite complex decisions and situations, where sometimes it can be easy to just lose sight of what the right thing to do is.”

The consultation is open until Friday 16 August, and is available here.

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