What has corporate governance done for us?

accapr —  20 November 2012 — 5 Comments

By Paul Moxey, head of corporate governance and risk management

It’s now 20 years since the Cadbury Code was introduced. This is the code adopted by the Listing Authority and the London Stock Exchange to restore trust in the City and in financial reporting and ensure that scandals such as BCCI, Polly Peck and Maxwell could not happen again. It set out 19 best practice principles for corporate governance – few people had heard of the term then. Its provisions, in fewer than 600 words, covered the role and structure of the board, audit and reporting on the company’s position including going concern, board remuneration and internal control.

The Code has grown through the years as it went through several iterations. It is now administered by the FRC and called the UK Corporate Governance Code and its principles and provisions take up around 5,500 words, roughly ten times as many as the original code.

Has the Code done a good job? Most experts think it has. The UK has seen few corporate scandals in the last 20 years and many would say that is thanks to the code and they are probably right. But has governance helped create value? We have had the financial crisis and, for savers and investors, little growth in share prices for the last 10 years.

We have however seen the growth of an industry of governance specialists and advisors and we have seen the failure of several banks and, as a society, we bear the scars. ACCA says that the bank failures were governance failures. Others see things differently and in December 2010 the FSA concluded its first inquiry into the failure of RBS saying it did not find evidence of governance failure on the part of the board. This surprised many people. If a company fails surely that points to governance failure unless the reason for it was clearly not to do with the board. It is hard to think of how the failure of RBS was not to with the board unless we consider they were just victims of circumstances.

Is a board responsible for what goes on or a victim of it? Let’s consider Barclay’s role in fixing LIBOR? The Treasury Committee, in its inquiry this summer, heard that the FSA, in a recent review, had considered Barclay’s governance to be satisfactory. The official conducting the review was reported to have said Barclay’s governance was ‘best in class’. During the same period, others at the FSA were concerned about the culture of Barclay’s at the top. Lord Turner, the FSA Chairman, wrote to the then Barclay’s Chairman about what the FSA saw as behaviour at ‘the aggressive end of interpretation of the relevant rules and regulations’ and about the bank’s ‘tendency to seek advantage from complex structures or favourable regulatory interpretations’. Lawyers call this creative compliance and it sounds a little like Enron.

It illustrates the main problem today with both governance and regulation – there is more to compliance than compliance. The focus with both governance and regulation has been on compliance with provisions -in the case of governance, with the Code’s provisions, where the banks and other companies of course fully comply with the letter. It is much harder to tell if companies follow the spirit of the Code and it seems that essentially no one has been looking at how companies do this. The culture at the top of an organisation and the tone set by the board are crucial to whether or not there is good governance but it is very hard for outsiders to judge. Very few company governance reports convey a real sense of this although there is usually plenty of well-crafted text to tell us everything is just fine.

The FSA is changing its approach to regulation to one where supervisors are allowed to exercise judgement. This will make it easier for them to decide when the spirit of a code or regulation is being followed. It may be harder to get a board to respond appropriately. The Treasury Select Committee Chair interpreted Lord Turner’s letter to Barclay’s as a reading of the Riot Act. The Committee report however makes it clear that neither the CEO nor the Chair of Barclays seemed to get the message although Barclay’s board minutes recorded the seriousness of the matter as it recorded ‘Resolving this was critical to the future of the Group’. The Committee report says that judgement-led regulation will ‘require the regulator to be resolutely clear about its concerns to senior figures in systematically important firms’.

A judgement approach is needed for how everyone else looks at governance for companies – investors and their advisors, the media and regulators – and us. As we hear more and more stories about the tone at the top of organisations such as News Corp and the BBC, and about the minimal amounts of UK tax paid by UK household names such as Amazon and Starbucks, it behoves us all to look more closely at large organisations and how they are governed -not just whether they comply with the rules. We should be asking more questions of our leading corporations and holding them to account.


5 responses to What has corporate governance done for us?


    Thanks Paul for a highly incisive perspective on corporate governance! Of the many important issues you raise, the one that really caught my attention is “It is much harder to tell if companies follow the spirit of the Code” and I do wonder what can tangibly be done to tackle this.


    Paul. A good blog; thanks.
    Isn’t it time that much more attention was paid by all concerned to the Main Principles in the UK Corporate Governance Code?
    The Listing Rules require a statement of HOW the listed company has applied the Main Principles in the Code, in a manner that would enable shareholders to evaluate how the principles have been applied.
    From a brief look at a few annaul reports, this is not often done well as the wording in the LRs allows the Principles to the reported on collectively. There also appears to be some confusion, as one report even referred to compliance with the principles (comply or explain only applies to the Code Provisions doesn’t it)?
    If we were really serious about more adherence to the spirit of the Code, as a starting point how about changing the LRs to requirie the boards of companies to explain HOW they have applied EACH of the individual Main Principles. Certainly more transparency and explanation might be reasonable start and adds a bit more rigour to the process.


    Thanks, Paul, for an insightful and punchy blog.
    Looking at the issue from a different perspective, there‘s growing consensus that culture and people are the weak link in governance. The necessary condition of effective governance – transparency (as Reformer points out) – would arguably provide the robustness that it needs.
    Transparency is wider and more effective than disclosure. Disclosure is of little use, because what is disclosed is at the discretion of the discloser, it’s too late, and bad news is usually suppressed whenever possible to protect the interests of the discloser.
    True transparency is the key to effective governance. If you know that what you do, produce and employ can be seen by everyone else (all stakeholders) then you will be encouraged to behave ethically and responsibly. Transparency permits everyone to exercise governance over the organization and hold everyone else to account. Is that what’s happening with Starbucks?


    Nice post Paul, extremely insightful. I think Raj has a great question there.

Trackbacks and Pingbacks:

  1. December 2012 Noteworthy News | Step-Up Finance - December 4, 2012

    […] The City has congratulated itself on 20 years of UK corporate governance codes, which, since the Cadbury document (1992), 70 other countries having followed-on by adopting similar guidelines. That is 19 Best Practice principles for corporate governance; the role and structure of the board which are now called the UK Corporate Governance Code. The question is, has the code done its job? […]

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