BlogsTime for a fresh look at corporate governance
The problem is not a failure to comply with rules but a failure in governance practice
By Paul Moxey | Published 16:19, 31 January 11
In 1992, after failures at Barings Bank and Polly Peck, Sir Adrian Cadbury proposed a voluntary code of governance based on best practice principles coupled with disclosure. The idea was for shareholders to consider the disclosures and hold boards to account if governance was wanting.
He thought this preferable as there is a danger that with external regulation companies comply with the letter of the rules, rather than their spirit. The Cadbury Code was accepted and evolved into the Combined Code.
Then came Enron, WorldCom, Ahold and Parmalat. In the UK we have always prided ourselves that our system is better but the UK Code has undergone several reviews, particularly for non-executive directors and audit committees.
These amendments were intended to make sure that non-executive directors ensure management does a good job and avoids extreme risk. But the financial institutions that a few years later suffered billions in losses complied with the new governance requirements and had leading edge risk management systems. Indeed the US Securities Exchange Commission and ratings agencies were particularly impressed with Lehman’s risk management.
Since then there have been more reviews and new requirements for boards and investors. These reinforce attempts to get boards and shareholders to do what has always been expected of them but something is still missing.
The problem was not failure to comply with governance requirements but failure in governance practice. The problem was with culture, human behaviour and incentives and motivation.
Governance codes do not address these well. Many people feel let down by business and high finance as the impact on public services, jobs, savings and pensions hits home. The UK Companies Act 2006 requires directors to have regard to a company’s impact on the community and the environment, its standards of business conduct and to the long term.
ACCA wants governance to focus more on these areas. We would like the UK Corporate Governance Code to urge companies to explain how the board sets the values and standards of the organisation, how it has regard for the long term and impact on the community and the environment. We would like institutional shareholders to take a more active interest.
The Cadbury Report is as relevant today as it was in 1992. It is based on openness, integrity and accountability. Openness builds confidence between business and those with a stake in it. It contributes to an efficient market economy, prompts boards to take effective action and allows shareholders to scrutinise companies.
Cadbury defined integrity as both straightforward dealing and completeness. Cadbury said that directors are accountable to their shareholders and both have to play their part in making accountability effective. Boards need to do so through the quality of the information they provide to shareholders, and shareholders through exercising their responsibilities as owners.
We should take a fresh look at our approach to governance and work out how to have real openness, integrity and accountability over what really matters - performance, values and principle.
He thought this preferable as there is a danger that with external regulation companies comply with the letter of the rules, rather than their spirit. The Cadbury Code was accepted and evolved into the Combined Code.
Then came Enron, WorldCom, Ahold and Parmalat. In the UK we have always prided ourselves that our system is better but the UK Code has undergone several reviews, particularly for non-executive directors and audit committees.
These amendments were intended to make sure that non-executive directors ensure management does a good job and avoids extreme risk. But the financial institutions that a few years later suffered billions in losses complied with the new governance requirements and had leading edge risk management systems. Indeed the US Securities Exchange Commission and ratings agencies were particularly impressed with Lehman’s risk management.
Since then there have been more reviews and new requirements for boards and investors. These reinforce attempts to get boards and shareholders to do what has always been expected of them but something is still missing.
The problem was not failure to comply with governance requirements but failure in governance practice. The problem was with culture, human behaviour and incentives and motivation.
Governance codes do not address these well. Many people feel let down by business and high finance as the impact on public services, jobs, savings and pensions hits home. The UK Companies Act 2006 requires directors to have regard to a company’s impact on the community and the environment, its standards of business conduct and to the long term.
ACCA wants governance to focus more on these areas. We would like the UK Corporate Governance Code to urge companies to explain how the board sets the values and standards of the organisation, how it has regard for the long term and impact on the community and the environment. We would like institutional shareholders to take a more active interest.
The Cadbury Report is as relevant today as it was in 1992. It is based on openness, integrity and accountability. Openness builds confidence between business and those with a stake in it. It contributes to an efficient market economy, prompts boards to take effective action and allows shareholders to scrutinise companies.
Cadbury defined integrity as both straightforward dealing and completeness. Cadbury said that directors are accountable to their shareholders and both have to play their part in making accountability effective. Boards need to do so through the quality of the information they provide to shareholders, and shareholders through exercising their responsibilities as owners.
We should take a fresh look at our approach to governance and work out how to have real openness, integrity and accountability over what really matters - performance, values and principle.
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