Why failing to limit company directorships could further undermine UK’s credibility

Government has come out against tighter controls on directorships in a move that could weaken the UK’s standing internationally.

Last year the Government consulted on the reform of Companies House. One of the questions was about whether individuals should continue to be allowed to hold unlimited directorships.

AAT’s view is that to achieve better company governance a cap on the number of directorships would help.

Why cap directorships?

Directorships bring certain obligations. High numbers of directorships do not just mean an individual is likely spreading themselves too thinly to meet their obligations, it is often, although not exclusively, a warning sign that an individual may be involved in some form of economic crime, especially money laundering.

International practice

Several other countries already limit the number of directorships that an individual can hold.

In Ireland, there is a cap of 15 directorships; while in France the maximum for public companies is 5.

In India, there has been a cap since 1956. It was originally 15 but was increased to 20 in 2013 (although this includes a further limit of 10 public directorships). This appears to work well, probably because there is a minimum 500 rupee (£30) per day fine for holding more than 20 directorships. This can rise to a maximum 2,500 rupees (£150) per day. The upper limit is more than the average monthly wage for a highly-skilled Indian employee and suggests that if a cap were introduced in the UK, meaningful penalties for failing to comply are essential to success.

AAT’s recommendation

If respondents to last year’s consultation supported a cap, they were asked to state what it should be.

Having considered the issue carefully, AAT was broadly supportive of a limit on directorships and made this clear in its response to the consultation.

As for the maximum number that should be allowed, this is a difficult balancing act.

A limit as low as 5, as in France, is likely to be too restrictive whilst a limit of 20 or more would likely be too generous and undermine the rationale for imposing a cap in the first place.

AAT, therefore suggested that a maximum of 15 directorships would be a reasonable approach.

Government rejects limitations

The Government finally published its long awaited response to the 2019 consultation last week.

Whilst some reform will take place, much will not, including a limit on directorships.

The response revealed that over 40% of respondents failed to answer this question at all, that 40% opposed a limit and that only 20% were in favour. As a result, the Government concluded;

“The Government will not proceed to introduce a cap on the number of directorships held by an individual at this point. We believe it preferable to verify identities and to provide more accurate linkage of records, thereby providing a more accurate picture of involvement with companies.

“Analysis of the register conducted by Companies House, together with comparison against other data sets and reporting of anomalies from obliged entities, will assist in identifying circumstances in which we believe the number of directorships poses a risk of criminal activity. This information will be shared with the relevant enforcement and supervisory bodies.”

Damage to financial credibility

This decision comes very shortly after the leaked FinCEN files showed that over 3,000 British companies were named in leaked Suspicious Activity Reports (SARs) – more than any other country in the world.

These activities have already damaged the UK’s international reputation as evidenced by a leaked US Treasury report describing the UK as a “higher-risk jurisdiction”.

The Government’s decision not to take action in this area looks not only badly timed but ill-judged and short-sighted.

However, AAT notes the door to reform has been left ajar with the statement that a cap will not be introduced “at this point” indicating that it may still be possible in the future. As a result, AAT will continue to press for change in this area and is sure others will join us.

Phil Hall is AAT's Head of Public Affairs and Public Policy.