April 15, 2025 The Role of Corporate Governance Professionals in Corporate Insolvency
Corporate insolvency is often the result of weak governance, where key principles like transparency, accountability, and responsibility are neglected. As businesses face the economic turmoil of an uncertain global landscape, good governance becomes an essential safeguard to ensure companies can avoid insolvency. Corporate governance professionals play a crucial role in ensuring that companies navigate financial distress with the proper oversight, structure, and adherence to legal obligations.
The Evolution of Corporate Governance in the UK
Corporate governance in the UK has evolved significantly, particularly in response to crises such as the COVID-19 pandemic. The introduction of the Corporate Governance and Insolvency Act 2020 (CIGA2020) was a key development, designed to address the economic fallout and promote rescue culture. While this reform brought in preventive measures like moratorium procedures (which allow directors to remain in control of a company subject to insolvency in order to come up with a rescue plan) and the suspension of certain contractual provisions, its uptake has been limited. One reason for this is the stigma around insolvency in the UK, which often places blame on the personal failure of directors, creating a reluctance to use available rescue mechanisms.
Despite this, CIGA2020 highlighted the importance of creditor duty, a concept already embedded in UK law. This duty requires directors to act in the best interests of creditors, especially when a company is nearing insolvency. As the legal landscape around insolvency has shifted, the role of corporate governance professionals has become even more crucial in ensuring that directors are properly trained and understand their responsibilities during times of financial distress.
Corporate Social Responsibility (CSR) and Preventing Insolvency
While CIGA2020 aimed to offer temporary relief, the role of CSR in preventing insolvency cannot be overstated. Studies show that companies with strong CSR practices are less likely to face insolvency (“Corporate Insolvency: Why Are Directors Afraid of Help? Preliminary Study on the Stigma Associated with Corporate Insolvency”, Ghio, 2023, and “Blame and culpability in explaining changes in perceptions of corporate social responsibility and credibility”, Souiden, 2022). Good CSR fosters a positive relationship with stakeholders, including employees, customers, and investors, making the company more resilient in the face of financial difficulties.
A focus on CSR can help mitigate the risk of insolvency by enhancing a company’s reputation and building trust within the business community. Moreover, when companies prioritise CSR, directors are more likely to consider the interests of all stakeholders, which aligns with the principles of stakeholder theory and agency theory. These theories argue that management should be accountable not just to shareholders, but to a wider group of stakeholders, thus supporting the company’s long-term solvency.
The Critical Role of Corporate Governance Professionals
As the oversight of corporate governance has become more complex, governance professionals—particularly company secretaries—have taken on an expanded role in corporate insolvency. The responsibilities of these professionals now go beyond traditional administrative duties and include key functions such as:
- Training and Supporting Directors: Ensuring that directors understand their responsibilities during financial distress, including creditor duty, and that they make informed decisions.
- Stakeholder Liaison: Managing communication with stakeholders, including creditors and shareholders, to ensure transparency and build trust during crisis periods.
- Crisis Management: Overseeing the implementation of rescue plans, including the use of moratoriums, and managing the potential reputational risks that accompany insolvency.
- Compliance and Legal Guidance: Ensuring compliance with evolving regulations, like CIGA2020, and seeking legal advice when necessary to navigate insolvency processes effectively.
Governance professionals are integral in managing the risk of insolvency by providing clarity on directors’ duties and facilitating the processes necessary for corporate survival, such as restructuring or liquidation.
Moving Forward
Although CIGA2020 introduced several important tools, there are still significant gaps in the legal framework that governance professionals must navigate. For example, the lack of clarity regarding creditor duty and the gaps in secondary legislation hinder the effectiveness of the reforms. Moreover, the minimal uptake of CIGA2020’s measures highlights the need for further support and guidance for governance professionals.
One potential solution is to make director training a mandatory requirement, ensuring that all directors are equipped with the knowledge and skills necessary to address insolvency. This could be accompanied by the creation of dedicated resources for corporate health checks and insolvency prevention tools.
Ultimately, corporate governance professionals are central to a company’s ability to manage financial distress effectively. By focusing on good governance and CSR practices, they can play a key role in preventing insolvency and fostering long-term stability in the face of economic challenges.
In Conclusion
The evolving role of corporate governance professionals is indispensable in the fight against corporate insolvency. While CIGA2020 provided some useful measures during the pandemic, it is the proactive engagement of governance professionals in areas like CSR, compliance, and stakeholder management that truly helps companies navigate financial turmoil. As the landscape of corporate insolvency continues to develop, it is essential that governance professionals are empowered with the knowledge, tools, and authority to guide their organisations through periods of financial distress, ultimately ensuring a more resilient business community.
How we can help
Corporate insolvency and CSR can both be challenging areas for businesses to navigate.
Elemental can help you with practical, straightforward guidance and practical support. We have a team of company secretaries, solicitors, governance experts and accountants who can provide clients with guidance on:
- financial reporting
- directors’ induction
- training on directors’ duties
- ESG reporting
- Governance reviews, and
- Board and committee evaluations.
Visit here, to find out more about our corporate governance services or if you would like to discuss how we can help you, please contact us.
