When Sir Adrian Cadbury unveiled the proposals that would become the founding block of the UK Corporate Governance Code at a press conference a quarter of a century ago, he said two objectives lay behind the desire to improve the way companies were run. The first aim was to restore confidence in public accounts by removing doubts about the quality of decision making. The second aim was to preserve the unitary board. This idea, which now seems dated, came at a time when it was widely suggested that control and challenge over management might work better with a two-tier board. The model came from Germany, where a supervisory board oversaw strategy and a management board ran the business.
It’s no fault of Sir Adrian's, but these objectives have only partially been met. People still doubt accounts because management has become adept at adding or taking away items so as to present profits that make it look good – so much so that Hans Hoogervorst, Chairman of the International Accounting Standards Board, gave a recent
speech warning about the habit. He said that profit figures promoted by management to the media and market would typically be 30% higher than the profit that would have been arrived at by strictly adhering to the relevant accounting standards.
In spite of the huge commitment to governance, trust in large companies seems to be lower today than it was after the Maxwell and Polly Peck scandalsOn the second front, Sir Adrian has had more success in preserving the unitary board, but one wonders to what purpose, given that its nature has been changed beyond recognition. Key functions on risk, remuneration, reporting and recruitment are now routinely delegated to subcommittees. The emphasis put on getting the right chairs for these demonstrates how power has shifted. At the same time, operational decisions are increasingly in the hands of the ‘exco’ – the committee of key executives. Critics say the main board focuses on compliance, while the decision-making power has moved elsewhere.
It is also the case that in spite of the huge commitment to governance, trust in large companies seems to be lower today than it was after the Maxwell and Polly Peck scandals, which led to the commissioning of Cadbury all those years ago. It also seems an inadequate tool to deal with the key concerns of today: the egregious levels of executive remuneration, the institutionalised use of tax havens to get round the spirit – if not the letter – of the law, the lack of true diversity in top management, the favouring of short-term advantage over longer-term sustainability and the frequency with which good people seem to do bad things under pressure from a corporate culture that puts results before everything else.
As highlighted in the recent
Review articles on the fallout from the Panama Papers (links at top right), it is the Institute of Business Ethics rather than the custodians of the Governance Code that seems more in touch with the mood of the time. And this raises a deeper question. Corporate governance has clearly had an impact in changing board and management processes. But should we not recognise that beneath this veneer it has been less successful in changing the values that guide the way business works?
Seen in this light, what governance has addressed are symptoms rather than underlying reasons – tackling the indications that business was not behaving as it should, rather than the root causes of these unwelcome behaviours.
Arguably too, the media and shareholder focus on the Code and the cost of compliance in terms of time, effort and money on the corporate side may perversely have masked the need and therefore reduced the pressure for genuine reform of business culture.
Finally, with its emphasis on the alignment of management and shareholder interests, governance may even have encouraged indifference towards the interests of other stakeholders – the employees, customers, suppliers and even governments. This, in turn, has exacerbated social tensions and undermined the reputations of business and its leaders.
It is obviously a bit harsh to lay all the ills of the modern world at the door of corporate governance and indeed that is not the intention. It should be accepted as a force for good. But it is equally important that we recognise its limitations – that more is not necessarily better, and that each corporate mishap is not best addressed by another revision of the Code. It is a framework, a scaffolding to support good decision making. But if the building itself is weak, scaffolding does not solve the problem. The best it can do is buy a little time. And if that time is not used wisely, ultimately the problems reassert themselves.
Look out for Anthony Hilton's First Person column in the July 2016 print edition of The Review.