On Sustainability Reporting

In 1987, the World Commission on Environment and Development (The Brundtland Report (1987), Our Common Future, Oxford University Press.), defined sustainability as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs.  Since then, the effects of climate-change have become more apparent and the need for sustainability more urgent. Indeed, sustainability has become such a watchword that some companies now treat it as a public relations slogan, promoting the sustainability of their production of sustainable products, without evidence, measurement, or reporting. Other companies take the challenge more seriously, recognising that investors and other stakeholders need information on how sustainability affects the companies’ value. But the challenges of sustainability measurement and reporting remain.

Now, IFRS has introduced two exposure drafts on sustainability disclosure standards. These are:

S1 General Requirements for Disclosure of Sustainability-related Financial Information

S2 Climate-related Disclosures

I suspect some of my readers will ask: who is or what are the IFRS? So let me start there:

Who is or what are IFRS?

At least half a dozen organisations operate under the acronym IFR S. The one that interests us is International Financial Reporting Standards,

which are published by the International Financial Reporting Standards Foundation.

The IFRS originated from a European Union (EU) attempt to develop a common accounting language to compare financial performance of companies across the EU member states. The aim was to develop a unifying set of consistent standards that are clear, enforceable, and accepted globally.  These standards have now been adopted and are required in more than 140 countries for financial reporting of market-listed companies, covering most major trading nations, other than the United States and China.  IFRS Accounting Standards are developed by a standard-setting board of IFRS, the International Accounting Standards Board (IASB).

In the United States, the Federal corporate regulator, the Securities and Exchange Commission (SEC) requires public companies to follow General Accepted Accounting Principles (GAAP) in their financial reporting. The GAAP system is based on rules, rather than standards. Consequently, GAAP is stricter on the definition of revenue, while IFRS allows some latitude. Conversely, on inventory valuation GAAP allows alternative valuation methods.  China follows neither IFRS standards nor GAAP rules, having its own China Accounting Standards for Business Enterprises regulations. The IFRS Foundation is incorporated as a not-for-profit, public interest company, incorporated in the USA State of Delaware.   For many years, the Foundation, together with the International Accounting Standards Board, was based in the City of London, the financial heart of the UK.

Recently, the Foundation moved a short distance, across the Thames, to Columbus Building, Canary Wharf, London E144HD.

The original mission of the IFR S Foundation was ‘to develop standards that brought transparency, accountability, and efficiency to financial markets, serving the public interest by encouraging trust, growth, and long-term financial stability in financial markets around the world.’

Now, the IFRS Foundation has formed a second board – the International Sustainability Standards Board (ISSB), which will develop and set IFRS Sustainability Disclosure Standards. These standards will cover the disclosure of corporate information about sustainability-related issues that could affect a company’s value.

Working in harmony, the standards set by the two boards will provide investors, the market, and other interested stakeholders with reliable information about companies’ financial position, performance, and sustainability factors that could affect their value.

Changes in the UK corporate regulatory environment

In the UK, the Financial Reporting Council (FRC) regulates the accountancy and actuarial professions, audit firms, and public companies financial reporting, setting the U.K.’s Corporate Governance Code and the Stewardship Code. Consequently, the FRC is the regulatory authority for market-listed companies that apply IFRS accounting and sustainability standards.

The FRC recognises that there is an increasing focus both on how companies report the impact of their activities on the environment and on the wider social challenges to which company business models must respond. The FRC have recently stated that ‘we want to leverage our role and responsibilities, alongside other regulators, the market, and other stakeholders, to help support a framework that allows for the growth of sustainable businesses. This involves understanding how the actions of companies affect the societies in which they operate, how they report on this, and how they are addressing this impact.’ Work on an ESG measurement and reporting framework continues to align companies’ activities with the long-term interest of society.

IFRS draft sustainability standards

Recognising previous fragmented approaches to sustainability reporting, the International Sustainability Standards Board formed a Working Group/, with representatives from the International Sustainability Standards Board, the Climate Disclosure Standards Board, the International Accounting Standards Board, the Value Reporting Foundation, and the World Economic Forum and its Measuring Stakeholder Capitalism Initiative. The International Organisation of Securities Commissions (IOSCO) and the International Public Sector Accounting Standards Board also participated.

IFRS S1 General Requirements for Disclosure of Sustainability -related Financial Information

This exposure draft focuses on the needs of capital markets in assessing enterprise value. It would require companies to disclose material information about all significant sustainability-related risks and opportunities they face. The draft recognises that such information would represent a penetrating insight into the way a company operates, including its governance, strategy, and risk profile. The definition of sustainability-related financial information is intentionally broad, being described under four ‘umbrella’ ‘core content’ topics.

This core content, required by the exposure draft, would need to cover:

1.Governance – the governance processes, controls, and procedures the company uses to monitor and manage sustainability-related risks and opportunities

2. Strategy – the approach for addressing sustainability -related risks and opportunities that could affect the entities’ strategy over the short, medium, and long term

3. Risk management – the processes the entity used to identify, assess, and manage sustainability -related risks

4. Sustainability metrics and targets – information used to assess, manage, and monitor the company’s performance in relation to sustainability -related risks and opportunities over time.

The draft standard also discusses matters of presentation, materiality, comparative information, reporting, sources of information and uncertainty of outcome, and statements of compliance. Sustainability-related information would be published with the current requirements of financial reporting.

IFRS S2 climate-related disclosures

This draft standard recognises that climate change presents significant risks, and potential opportunities, to all entities in every economic sector. These risks and opportunities may arise directly or through interconnected operational chains. The exposure draft is intended to enable users of financial reports to make investment and stewardship decisions, by revealing an entity’s exposure to and management of climate -related risks and opportunities.

The exposure draft sets out the requirements for identifying, measuring, and disclosing climate-related risks and opportunities. The four ‘umbrella’ ‘core content’ topics identified in draft sustainability standard S1 are used, requiring the disclosure of:

1. Governance – the governance processes, controls, and procedures an entity uses to monitor and manage climate-related risks and opportunities

2. Strategy – the climate-related risks and opportunities that could enhance, threaten, or change an entity’s business model and strategy over the short, medium, and long-term including:

  • whether and how information about climate-related risks and opportunities inform management’s strategy and decision-making
  • the current and the anticipated effects of climate-related risks and opportunities on its business model
  • the effects of climate-related risks and opportunities that could reasonably be expected to affect the entity’s business model, strategy, and cash flows, it’s access to finance, and its cost of capital, over the short or long term
  • the resilience of its strategy and its business model to climate-related risks

3. Risk management – how climate -related risks and opportunities are identified, assessed, managed, and mitigated by the entity

4. Sustainability metrics and targets – the information used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities including:

  • performance and outcome measures that support the qualitative disclosures and governance, risk management, and strategy disclosure requirements
  • targets that the entity uses to measure its performance goals related to significant climate-related risks and opportunities

Comments on the two exposure grafts as called for by the International Sustainability Standards Board by July 2022. Publication of the final standards are likely towards the end of 2022 or early 2023.

Concluding comments

Throughout the two drafts and the accompanying commentary, corporate bodies are described as ‘entities’, not ‘companies’. This follows the recognition, reflected in the King lV Corporate Governance Code, that all corporate entities need to be governed, not only stock-exchange listed companies, as in the original Cadbury and subsequent corporate governance codes around the world. Consequently, the sustainability-reporting codes would apply to public companies with dominant family or block-holder shareholders, significant companies wholly or partly owned by a parent company, companies dominated by sovereign funds, state-owned enterprises, and limited liability partnerships, as well as to listed companies with many and varied shareholders.

This approach, calling all types of enterprise ‘entities,’ rather than ‘companies,’ will be followed in the fifth edition of my OUP corporate governance textbook, which is currently under preparation.

The new International Sustainability Standards Board (ISSB) needs a fundamentally different and unique perspective from that of the existing International Accounting Standards Board (IASB). The focus of the IASB is that of the accountant, recording and reporting profits, cash flows, and net worth, looking through the rear-view mirror. (In other words, the left-hand, conformance side of the corporate governance matrix) The outcome can be audited, certifying that the results show a true and fair view of the situation.

By contrast, the ISSB needs to focus of the strategist, concerned with estimates and expectations, forecasts, and probabilities, looking through the windscreen at the road ahead. (In other words, the right-hand, performance side of the corporate governance matrix) An audit could only consider the logic and veracity of the strategies and risks disclosed.

The challenges with these broad sustainability reporting standards will come with attempts to turn the core components into meaningful statements and metrics that can be tested and compared, without revealing the existence of risks and opportunities, strategies, and business models that could be valuable to potential competitors or predators.

Bob Tricker, May 2022

The corporate governance implications of climate change

The November 2021 COP26[1] Conference in Glasgow reflected a global paradigm shift in attitudes towards climate change. In both the business community and in government, many now accept the significance of climate change around the world and recognise a need for new strategic thinking. Adding the word ‘sustainable’ to business activities or emphasising the importance of ‘sustainability’ in corporate activities will no longer suffice.

The automobile, coal mining, and energy industries have already reacted to changing circumstances, including limitations imposed by governments on their activities. COP26 accepted further restrictions on deforestation, coal mining, and agriculture. But the most significant development was a long-term agreement by the global financial sector to limit future investment in climate damaging industries.

Boards of companies in every sector need a clear climate strategy within their overall corporate strategy. Regulators are likely to require reporting of such strategies, including plans to reach zero-carbon emissions. Carbon trading and offsetting systems might form part of such strategies. Further metrics are likely to emerge to measure and report emissions and the reduction of carbon footprints, both by companies and throughout their supply chains. In future, the decisions of prospective customers, employees, and investors may depend on their perception of your climate change credentials.

          The corporate governance in every governing body includes a responsibility for strategy formulation and policymaking. These performance-related activities must now embrace climate change strategies and policies. Working with and through the Chief Executive and senior management, boards may need to review their procedures. Board reporting may need extending. One approach could be a board sub-committee with climate change responsibilities; another could be the appointment of a director to lead the board’s work in the field.

          Climate change is now firmly on the corporate governance agenda. The one outcome that cannot be considered is ‘do nothing’.

Bob Tricker

November 2021

[1] COP stands for Conference of the Parties. The event is a global United Nations summit about climate change and how countries are planning to tackle it.

Corporate governance in Hong Kong and the rest of China

Corporate governance in Hong Kong

In our book, Understanding Corporate Governance in China,[1] Greg Li and I explain how, after 150 years of British rule, in 1997 Hong Kong was returned to China, under the joint Sino-British agreement, known as the Basic Law, founded upon the notion of ‘one country, two systems.’

          The Basic Law provided Hong Kong with a de facto constitution, providing for a continuation for 50 years of many of the existing ways of life, including British-style common law, with an independent judiciary, its own currency, the right to tax, and a limited form of democracy, with elections through representative constituencies, overseen by a Hong Kong Legislative Council (known as LEGCO).

          This situation continued until 2020, when Beijing passed the National Security Law (NSL), covering Hong Kong, without consultation and without LEGCO involvement. At the time, many thought this was no more than a response to student calls for independence for Hong Kong associated with wider civil unrest pressing for more democracy. A year’s experience of the Act suggests otherwise. In fact, the NSL seems now to be providing Hong Kong with an alternative constitution, overriding the Basic Law.

          Essentially, the NSL makes any act by a person or organisation deemed a threat to China’s national security a criminal offence with severe penalties. The Act does not define ‘national security.’ Unlike legislation passed by LEGCO, which followed the British legal practice of detailed laws extended by precedent.  By contrast, the NSL, which was drafted in Beijing, is broad, leaving its interpretation to state authorities. The NSL does not define ’national security’ but includes any act deemed likely to affect economic security, financial security, cyber security, technological security, commercial security, or any other aspect of national security.

          What might constitute a challenge to national security in Hong Kong is determined by Hong Kong’s Chief Executive, supported by Hong Kong Government officials, all approved by (and in most cases appointed by) the authorities in Beijing.

Implications of the National Security Law

          The immediate result of the NSL was the closure or movement abroad of NGOs devoted to wider democracy in Hong Kong. A few citizens and corporations also relocated overseas. However, a year’s experience of the NSL has suggested wider implications, including many for corporate governance.

          The broad sweep of the NSL meant that it embraced not only obvious security threats, such as acts of civil disobedience, but could include all media communications, any publication by a company in a company meeting, public or private; indeed, all forms of communication and all records. The Act could be applied to company meetings including meetings of shareholders, management, the board and board committees, and interactions with customers, suppliers, and sources of finance.

          The NSL is likely to prove a particular challenge to international companies operating in Hong Kong and Chinese companies with connections abroad, because many of the perceived threats to China’s security are likely to involve overseas interests. For example, an American company, fulfilling United States demands for sanctions against China, could find itself in trouble with the Chinese authorities for threatening China’s security.

          A successful prosecution under the NSL could penalise a company and its executives. For an overseas company, this could mean that one of their executives, even though only transiting through Hong Kong, perhaps en-route form the Philippines or Vietnam to New York, could be arrested. The reverse of the situation has already been seen when the Finance Director of Huawei, the vast Chinese electronics company, with close ties to the Chinese Government, was arrested when changing planes in Canada, on an extradition warrant issued by the United States, for a crime allegedly committed by Huawei.

          The Chinese authorities have responded to similar concerns expressed by other commentators (Kwok and Donkervoort, 2021) [2]

by suggesting that China is unlikely to act prejudicially to its own economic and commercial interests.

          Of course, business will continue in Hong Kong, as companies and entrepreneurs recognise the opportunities, both in Hong Kong and in mainland China, taking inherent risks into account. But the inevitable effect of the NSL will be a greater degree of caution and the likelihood of self-censorship in meetings and communication.

Boards of companies involved with China need stated policies that ensure their corporate activities meet possible challenges under the NSL. Such policies might need procedures to monitor the political and legal application of the NSL, and protocols that identify possible exposure to national security issues, that assess the risk, and report to the board or a board committee for appropriate action, which could be to do nothing, adjust that activity, or drop it immediately.

Corporate governance in mainland China

          In our 2019 book, Gregory Li and I describe corporate governance in mainland China as an evolutionary process, in which the Government recognised the importance of corporate governance, seeing it as the way to economic growth, rather than as a regulatory process. Recently, however, that evolution has moved on. China no longer expects the double-digit growth which propelled it, through twenty years of economic success, to become the second largest economy in the world.

Over-gearing in the property sector has exposed weaknesses in financial institutions. An ageing population challenges the growth stemming from earlier migration from village to city. China also faces a growing social disparity between a newly created affluent middle class and the remaining population. Political and trade relations with the United States and Europe have exacerbated economic challenges.

Consequently, China has become more assertive in its relations with its own private sector. Freedoms preciously granted to create markets, expand abroad, float on stock markets (even in the US), have come into focus and, in some cases, have been curtailed, particularly where companies and their leaders were seen to be acquiring significant power. The failure of the Ant Financial Group’s gigantic IPO (discussed in a previous blog), at the insistence of the Beijing authorities, provides a clear example. It seems that the regulatory authorities’ oversight, including the Ministry of Finance, the Bank of China, and relevant sector agencies have all tightened their governance oversight. Corporate governance throughout China remains an evolutionary process, in which the Chinese Government plays a fundamental role.

Bob Tricker

October 2021

[1] Tricker, Bob, and Greg Li (2019), Understanding Corporate Governance in China, Hong Kong University Press, Hong Kong

[2] Kwok, Dennis W…h. and Elizabeth Donkervoort (2021), The Risks for International Business, The Ash Centre for Democratic Governance, Harvard University

The Future of Corporate Governance – a personal odyssey | Part 3: Reinventing the corporation

Calls to reinvent the public company

The need for the place of the corporation in society to be rethought is not new. The author called for the concept of the joint-stock limited liability company to be re-thought, in 2011 (Tricker, Bob (2011) Re-inventing the Limited Liability Company, Corporate Governance – an International Review, Volume 19 Number 4, July 2011).

Society has lost the control which it originally demanded for the right to incorporate (limited liability) companies. Faced with government support of failing companies, a growing concern for corporate social responsibility and sustainability (and many other contentious issues), the time has come to rethink the rationale, the purpose and the governance of the joint-stock, limited-liability company.’

Others have also seen the need to rethink the place of the public company in society.

The ‘Tomorrow’s Company’ project

‘Tomorrow’s Company,’ (www.tomorrowscompany.com) a UK not-for-profit think-tank, has attempted to encourage an approach to business that creates value for staff, shareholders, and society through a focus on purpose, values, and relationships in the long-term. The project’s objectives were re-stated in 2016, in the light of twenty years’ experience, to develop companies that had:

‘a purpose beyond profit and a set of values that are lived through the behaviours of all employees to create a self-reinforcing culture
– collaborative and reciprocal relationships with key stakeholders – a strong focus on customer satisfaction, employee engagement, and where possible, collaboration with suppliers, alongside working with society
– a long-term approach that embraces risk
– investing long-term and embracing disruptive innovation’

The Business Round Table Declaration

In 2019, over 180 CEOs of major US corporations signed a Business Round Table Statement, accepting the need for a more stakeholder-centric approach to corporate decision making. However, subsequent research showed that many of these CEOs signed the declaration without raising the issue with their boards, with some signing more as a public relations exercise than an intention to change business behaviour or investor relations. [Bebchuk and Tallania (2020)] (www.papers.ssrn.com/so13papers.cfm?abstract_id=35449768 The Illusory Promise of Stakeholder Governance)

The Purpose of The Corporation Project

This Project provided ‘a strategic platform to promote the long-term health and sustainability of publicly listed companies.’ More than 260 leaders in business management, investment, regulation, and academia contributed to a Global Roundtable Series; to ‘identify desired outcomes and principles of corporate governance fit for the challenges of the 21st century.’ Their report Corporate Governance for a Changing World [Veldman, Gregor, and Morrow (2016)] (Papers.ssrn.com/so13/papers.cfm?abstract_id=2805497) asked ‘What is the purpose of the corporation?’ The Roundtables focused on the relationship between corporations and shareholders, with the intention of reducing shorttermism and encouraging longer term strategic thought.

The World Economic Forum initiative

As we saw in Part Two of this treatise, The International Business Council of the World Economic Forum published ‘The New Paradigm: a roadmap for an implicit corporate governance,’ which called for a partnership between corporations and investors to achieve sustainable long-term investment and growth. The proposal recognised the inevitable clash with the short-term profit motives of some shareholders and sought a paradigm shift towards longer term profitability, which was unlikely to please some private equity investors intent on making a fast, short-term return.

The academic perspective

The Editors of the research journal Corporate Governance – an International Review (CG-IR), writing about developments in the journal during 2021, commented:

‘…the debate over the role of corporations in society (is) back in prominence. Both practitioners and academics are hard-pressed to address important questions. Do corporations cater sufficiently to the needs of their stakeholders and societies at large? Are manager incentives too shareholder-centric and do we focus minds on creating corporate purpose that can advance stakeholder interests without compromising shareholder value? Do we need more regulation or will market participants change long-established paradigms and practices themselves to address current as well as future challenges? Are the emerging Environmental, Social, and Governance (ESG) frameworks fit for purpose and how do we create meaningful metrics that lead to more transparency, comparability, and eventually to consequential accountability?‘ [Stathopoulos and Talaulicar (2021)]

Joseph Rowntree Foundation Report 2021

The Joseph Rowntree Foundation, supported by the UK Government’, in a 2021 Report (Soodeen, Frank (2021), Purpose-led firms: resolving tensions in stakeholder capitalism and redesigning the economy, Joseph Rowntree Foundation, January 2021), called for capitalism to reflect societies’ changing attitudes, with a review of the social licence that society, under the Companies’ Act, gives to companies to operate.

Criticisms of shareholder governance

Shareholder capitalism involves a corporate governance system rooted in existing company law, in which power is based on ownership: shareholders have the right to nominate and elect the directors who govern the company for their benefit.

As the Editors of CG-IR suggest, both practitioners and academics have questioned the behaviour of major corporations around the world. These criticisms include:

  • In major public companies, shareholder power is an illusion: shareholders are numerous, geographically spread, and vary in their investment objectives. Shareholders no longer wield real power, which has shifted to the incumbent
  • Directors, with independent directors, required by corporate governance codes to serve on board nomination and remuneration committees, drawn from connected elites.
  • Multi-class shares, which give greater voting rights to company founders or other blocks of shareholders, allow them to dominate governance over other shareholders with minority voting rights
  • Acquisition strategies, led by a drive for growth, that encourage hostile predator activity, which can lead to market domination and monopoly situations
  • Ignorance of some corporate strategic risks and over exposure to others
  • Aggressive tax avoidance, in which international companies legally move profits generated in high tax countries to low tax regimes
  • Growing interest in and questioning of business behaviour, corporate culture, and organisational ethics
  • Reported cases of domination by over-powerful directors
  • Perceptions of top management greed and excessive top management remuneration, including golden handshakes, golden parachutes, and bonuses not linked to performance that can reward failure
  • Sovereign funds, invested by rich states in companies in other countries, which could put pressure on corporate decisions that might be driven by political, governmental interests, rather than economic and commercial criteria
  • Concerns about government support for failing companies. Many people see no reason for taxpayers to be liable for corporate debt, just because these companies are thought to be ‘too big to fail.’
  • Criticisms of board membership, lack of diversity
  • In the original 19th century public company, society permitted the creation of companies only if their purpose was clearly defined and their life span finite. These constraints no longer exist.

These specific issues have been reinforced by a broader concern about the role of companies in society, with calls for greater corporate social responsibility and concern for sustainability. There have also been calls for companies to be measured against environmental, social, and governance (ESG) criteria, in addition to financial profit -based measures. (Sometimes called the ‘triple bottom line’). However, enthusiasm for ESG has its limitations. As James Kirkup,
Director of the Social Market Foundation, wrote (Kirkup, James (2021) The Overdue Challenge to the law that could save British Capitalism, The Times, 2 June 2021):

Without better definitions and rigour, there’s a risk that ESG is dismissed by many as little more than shallow PR.

Advantages of shareholder governance

However, against this catalogue of alleged failings, shareholder capitalism offers substantial benefits, which have been proven over many years and need to be recognised.

The joint stock limited liability company was an invention of the 19th century and, like the steam engine, revolutionised society, creating untold wealth, employment, tax revenues, innovation, and social change over nearly two hundred years. Created initially to raise funds from public investors, the idea proved so successful it morphed into complex corporate groups organised in chains, pyramids and networks, and private companies, incorporated to limit owners’ exposure to debt, rather than to raise funds from the public. The benefits of shareholder capitalism include:

  • Shareholders risk their equity by investing in a company and benefit from any dividends declared and increases in corporate value, reflected in the share price.
  • Pension funds, life assurance companies, and charities rely on the wealth created by public companies, reflected by the stock market, to meet current demands, and face future commitments.
  • Directors of a company should not be expected to make decisions on behalf of the community – that is the role of government. The state, at every level, is responsible for managing the community’s economic, social and legal situation – and should be accountable for them. A company is not legally responsible to the community, except in its duty to obey the law. In other words, directors should not be expected to decide what is desirable on behalf of the community, but to follow the rules that community sets. Government at the national, provincial and local level should set the control of markets and competition, health, education, the environment, and defence.
  • Boards of listed companies need to satisfy their shareholders’ expectations, or the share price will fall, and potential predators threaten hostile bids; that is the market discipline constantly faced by directors: that is the discipline imposed on boards by the market.
  • Society is also dependent on taxes generated by companies

Nevertheless, shareholder capitalism remains under challenge, so what might an alternative stakeholder capitalism involve?

An alternative model – stakeholder governance

Calls for boards to care for their customers, be fair to their suppliers, be concerned for their employees, and recognise the interests of their shareholders, in the long term, are commonplace. More recently, companies’ effect on climate change and the environment have been added to the demands. As Paul Polman said in a McKinsey podcast (Polman, Paul (2021), Stakeholder Capitalism – a conversation with Vivian Hunt and Diane Brady, McKinsey Podcast, 6 May 2021): ‘Companies must now compete on trust and deliver value to multiple stakeholders.’

The UK Companies Act 2006 (S172) expects company directors to recognise their contractual stakeholders (as far as the author is aware, no action has ever been brought against directors under this section). The act lays down the duty of directors ‘to promote the success of the company:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (i.e. shareholders) as a whole, and in doing so have regard (amongst other matters) to:

  • (a) the likely consequences of any decision in the long term
  • (b) the interests of the company’s employees
  • (c) the need to foster the company’s business relationships with suppliers, customers and
  • others
  • (d) the impact of the company’s operations on the community and the environment
  • (e) the desirability of the company maintaining a reputation for high standards of
  • business conduct
  • (f) the need to act fairly as between members of the company

Obviously, any company that failed to do these things in the long term would be unlikely to survive, but company law in other jurisdictions typically does not include such strictures.

The Joseph Rowntree Foundation 2021 Report already mentioned (Soodeen Frank (2021), Purpose-led firms: resolving tensions in stakeholder capitalism and redesigning the economy, Joseph Rowntree 1 June 2021), called for the UK Companies’ Act (S172) to be changed to ‘give real force presumably by making proven failure to abide by S172 an offence. The problem might be proving such failures in court.

Stakeholder capitalism calls for an alternative corporate governance model, based on relationships between the company and all those involved with it. In other words, in stakeholder capitalism, power over the company would be based on relationships not ownership. How that is to be achieved is less clear. In fact, interests of stakeholders are not
homogeneous but compete for corporate cash flow – better terms for employees, higher prices for suppliers, lower costs to customers, bigger dividends for shareholders.

However, it is not clear how stakeholder capitalism would operate in practice, nor whether it would create more value, higher employment, or more innovation than shareholder capitalism. Advocates of stakeholder capitalism (in this treatise, ‘stakeholder capitalism’ is used to cover the underlying concepts; ‘stakeholder governance’ to describe the governance processes involved), recognising short comings in the shareholder governance model, seem drawn by the apparently more democratic governance structure, involving all those with a stake in the entity. Enthusiasm for stakeholder capitalism, to date, seems rooted more in liberal values of social equity and fairness than on evidence. But approaches to stakeholder governance are evolving. It is recognised that metrics are needed to identify, measure, and report on relationships with stakeholders. Similarly, metrics are needed to evaluate performance on ESG (environmental, social, and governance) criteria. However, such metrics remain nebulous and would only become valuable when issued, regulated, and enforced, like International Accounting Standards are for the reporting of financial information.

Stakeholder governance will not work under existing company law

Directors of companies, incorporated under company law, are stewards for their shareholders and, thus, required to create profits, while remaining within the law. Over every discussion of stakeholder capitalism looms the Friedman shadow: ‘the social responsibility of business is to increase its profits…’ [Friedman (1970)].

Bower and Paine (2017) argue that shareholders are not de facto owners of a company, though de jure they certainly are. This leads them to propose a shift from shareholder-centred governance to a company-centred’ perspective. The authors offer a range of governance activities that would change, but do not address the key question of where power over this entity would lie. That could only be achieved by changing the legal concept of a company.

As long as the joint-stock, limited liability company remains the constitutional vehicle, the company belongs to the shareholders. Any growth in value accrues to them. On a winding up, the funds belong to them, according to their shareholding, once legitimate claims of employees and creditors have been met. Ownership is the basis of power in the conventional constitutional model of the corporation.

No amount of stakeholder rhetoric can overcome the legal duty to create value for investors, no matter what stakeholder information or ESG metrics are reported. As long as companies are incorporated under laws that give power to owners, stakeholder capitalism is irrelevant. So, a basic assumption of this paper is that new law will be needed for the incorporation of stakeholder-based governance. Such a law would redefine the joint-stock, limited liability company and embrace other corporate entities in a new governance structure, in which power lay with all those involved.

Criteria essential for stakeholder governance

The ongoing debate about the future of the company is actually a discussion on the balance of power over corporate activities and the ownership of its wealth. Limited liability companies are creatures created by the law: only with a change of law can they evolve. That is why the corporation needs to be reinvented.

A stakeholder model of corporate entities would need laws that:

  1. Applied to all corporate entities, irrespective of their membership, purpose, scale, location, or method of funding. In other words, no distinction should be drawn between public and private entities, or profit and not-for-profit organisations
  2. Enabled legitimate stakeholders in the entity to be identified
  3. Facilitated communication with those legitimate stakeholders
  4. Gave legitimate stakeholders governance power to nominate and elect members to the governing body
  5. Provided for a governing body that represented all legitimate stakeholders
  6. Required the governing body to report on their performance and be accountable to the legitimate stakeholders

What might this new corporate entity be called?

Clearly, it should not be called a ‘company;’ that word carries too much baggage. In this paper, the new form of corporate entity will be called an ‘Enterprise.’ This concept carries no preconception about ownership, purpose, operations, scale, or location. It is intended to be a generic name for any corporate entity incorporated as an ‘Enterprise.’ (the concept of the Enterprise, developed in this paper, should not be confused with another recent UK
development – the social enterprise, which describes the purpose of a business, not its legal format). The word ‘Enterprise’ would appear in each corporate name, abbreviated to ‘Ent’., in a similar way ‘Company’ being abbreviated to ‘Co.’ Some financial reporting procedures and accounting standards may need expanding to meet Enterprise accounting needs.

An Enterprise Act would need to cover, inter alia:

  • Enterprise formation – statement of name purpose, address, founders, initial funding, approval of name
  • Enterprise constitution – articles of association (rules for governing and managing the enterprise), role of enterprise secretary, reports to enterprise official registrar
  • Enterprise governance – register of stakeholders, meetings of stakeholders, powers of the board, board standing committees
  • Establishment of stakeholder rights
  • Identification and registration of enterprise groups
  • Enterprise directors – nomination, appointment, powers, duties, disclosure of interests, service contracts, disqualification
  • Accounts, reports, and audit
  • Distributions to investors and other stakeholders
  • Returns to the authorities and society – annual and more frequent reports and returns
  • Acquisition and mergers of enterprises
  • Dissolution and winding-up
  • The Enterprise Registrar – authority, duties, investigations

What would an enterprise actually be?

An enterprise would be a corporate entity governed by its stakeholders, that is the constituent groups needed to fulfil its purpose and affected by its activities, which will typically include its employees, its suppliers, customers in its distribution or service chain, and its sources of finance, along with the society might affect.

The basis of power over an enterprise depends on relationships not ownership. Governance power is held by the contractual stakeholders, not the shareholders in a limited liability company. In other words, an enterprise involves a relationship between all participants in that entity, not just capital.

An enterprise can own assets, employ people, make contracts, in an existence independent of its stakeholders. The life span of an entity can be determined by its constitution or indefinitely, if no term is specified. This might imply that enterprises exist in perpetuity, but as with limited companies the reality is that most enterprises will have a finite life before being merged, sold, or wound up.

Who are the stakeholders of an Enterprise?

A stakeholder can be thought of as any individuals or entities that could be affected by or whose actions could affect the Enterprise. Consequently, both the stakeholder and the Enterprise have an interest in each other. In the Enterprise governance model, both stakeholders and Enterprise have an opportunity to know about and influence each other.

The Stakeholder Sectors to be included for a given Enterprise would be defined in the Enterprise Constitution. They might include:

  • Members
  • Employees
  • Suppliers and the supply chain
  • Customers and the delivery chain
  • Providers of capital
  • Environment and societal interests

Since power over an entity can be influenced by its stakeholders, each sector will need careful definition in the Enterprise Constitution. Moreover, as the Enterprise concept is intended to embrace every type of corporate entity, irrespective of its constitutional structure, purpose, or business model, further elaboration of the broad Stakeholder Sectors is needed.


The members are those for whom the Enterprise was created and for whom it ultimately exists. In the shareholder governance model, the shareholders are the members. But in the Enterprise Stakeholder model there are no shareholders. So, each Enterprise Constitution will need to specify the membership with some precision.

Essentially, the members are those for whom the enterprise exists. This might, for example be the:

  • Owners of a family business
  • Members of a sports club
  • Supporters of a football club
  • Patients of a medical or dental practice
  • Patients of the British National Health Service
  • Guests of a hotel or a restaurant enterprise
  • Clients of a consultancy enterprise
  • Students and faculty of a college or university
  • Members of a co-operative society
  • Subscribing members of a charity
  • Members of a trade union
  • Members of an arts association
  • Patrons of a theatre
  • Parent entity of a subsidiary enterprise

The enterprise constitution would also define members’ rights and privileges, who would be bound by the rules in that constitution. Membership rights would, typically, include the right to receive financial and other information about the enterprise, the right to attend members’ meetings, and vote on the election of their Stakeholder Representatives to the Stakeholder Forum. Membership of an Enterprise would carry responsibilities as well as benefits.


Employees represent an obvious Stakeholder Sector. The sector needs to embrace everyone involved, including part-time employees, contract workers, and commission agents, not overlooking past employees and potential future employees. Some employees may be represented by their trade unions; others by representatives they elect to represent them. Managers at all levels will also be represented.

Suppliers and supply chain stakeholders

All suppliers of goods and services to an Enterprise have a place among its Stakeholders. This includes not only immediate suppliers to the Enterprise, but those in supply chains. The mutual interest in the behaviour of a link in a supply chain can be relevant to an Enterprise, for example to avoid child labour or damage to the environment. Suppliers of services, such as consulting advice, information services, and other external contractors would be included. The Enterprise auditors, however, will be excluded, to preserve their independence in reporting to the client Enterprise and its stakeholders.

Customers and delivery chain stakeholders

Enterprise customers form another obvious, stakeholder group. Where a delivery chain exists, for example of agents, representatives, wholesalers, or retailers, these too need to be seen as legitimate stakeholders. Some entities, however, do not provide their outputs to those they identify as ‘customers,’ but rather to members (a cooperative, a club, or a professional institute, for example) or to subscribers (as in an entertainment streaming service). Whatever name may
be given to the recipient of the Enterprise’s output, they are legitimate stakeholders of that Enterprise.

Providers of Enterprise finance

The providers of Enterprise finance clearly form an important Stakeholder Sector. In the shareholder governance model, the shareholders provide the unpinning equity finance: but in the Enterprise model, there are no shareholders. Instead, funds would be provided by interest-baring or profit-sharing instruments offered by Enterprises to the financial market, subject to Enterprise law. Financial institutions offering investment opportunities in public enterprises to the market would also be included among the financing stakeholders

This sector also includes those providing loans to the Enterprise, irrespective of their contractual terms, including interest-bearing loans (secured or unsecured), over-drafts, and other financial instruments.

Environment and societal interest stakeholders

The final stakeholder sector indentured in figure 1 is the broad category labelled ‘environment and societal interests.’ This sector includes the wide range of interests now frequently described as ESG (Environment, Society, and Governance) interests. The various metrics that have been suggested for monitoring firms’ performance in this field, indicate a wide range of potential interest groups. Identifying representatives of this sector would present a challenge, because in many organisations they would be numerous, occasional, and of varying significance. Nevertheless. representative bodies would undoubtedly emerge, once the concept of Enterprise governance was accepted.

What are the basics of enterprise governance?

Enterprise governance would be founded on:

  • Enterprise law
  • The Constitution of the Enterprise
  • A Stakeholder Forum
  • A Board of Directors
  • Executive Management

In essence, proposed Enterprise Law would provide the foundation for enterprise governance, just as company law underpins limited liability companies. The Constitution of each Enterprise would identify its purpose, its Stakeholder Sectors, and determine how each sector would be represented on the Stakeholder Forum. The Stakeholder Forum would oversee the work of the Board of Directors. Each Enterprise’s Constitution would also determine the number or
percentage of directors to be appointed to represent stakeholders on the Board of Directors. The Board of Directors would also have the right, under Enterprise Law and its Constitution, to appoint Independent Outside (non-executive) Directors to the Board, to provide advice, experience, and oversight.

Figure 1 illustrates the structure of Enterprise governance. The board in this example has 6 stakeholder Directors (S), 5 Independent Outside Directors (I), and 3 Executive Directors (E).

In the Enterprise stakeholder governance system, the Board of Directors would be the dominant power, just as in shareholder governance. The founders of an Enterprise would establish its Constitution and, therefore, determine the number and balance of the Stakeholder Forum. Members of the subsequent incumbent board would, subject to the constitution, appoint both independent and executive directors.

The basic elements of Enterprise governance

Enterprise law

Enterprises would be incorporated under a new Enterprise Act, within a specific jurisdiction. The Act would determine the requirements for Enterprise incorporation and registration, relations with stakeholders, nomination and election of directors, required financial and other reporting, audit, and other matters concerned with the governance of the Enterprise.

Enterprise law would enable the creation of an artificial being, with many of the attributes of a human being – to own assets, incur debts, employ people, make contracts, and be accountable under the law – very much like limited liability companies under Company law.

Consequently, the answer to the question ‘who owns the enterprise?’ is ‘the Enterprise.’ In a limited liability company, the company itself is owned by its shareholders. In an Enterprise, however, there are no shareholders, so the Enterprise would in effect own itself, until a decision was needed about its disposal, in which case the Board of Directors, acting through the Stakeholder Forum would act, subject to the Enterprise Constitution.

Larger Enterprises might be required by the law to create board audit, nomination, and remuneration committees, as required by moist corporate governance codes for listed companies. Under Enterprise law, power over the Enterprise would be exercised by the Stakeholders, through the Stakeholder Forum and the Board of Directors.

Strategically significant decisions on the future of the Enterprise, including its sale, merger, or acquisitions will be proposed by management, agreed by the Board, and approved by the Forum. Fundamental decisions, as defined in the Enterprise Constitution or Enterprise Law, would need to be approved by the Forum after consultation with Stakeholder Sectors.

Only if an enterprise is sold or wound-up will ownership become important. On a sale of the enterprise, the Stakeholder Forum, working with the Board of Directors, will decide the distribution, subject to the constitution. On a winding-up, again the Forum and the Board would decide the outcome, with no Stakeholder Sector being liable for corporate debts.

The Enterprise Constitution

The Enterprise Constitution is the fundamental governance document, which creates the entity, identifying its name, location, and purpose. A crucial element of every Constitution would be the identification of the Stakeholder Sectors relevant to that Enterprise.

The Constitution would also establish the number or percentage of directors to be appointed to represent each stakeholder sector. It would also establish rules for the governance and management of the Enterprise, within the Enterprise law of the relevant jurisdiction.

The Board would have the ability to appoint independent, non-executive directors to add weight to the board, providing advice, experience and, above all, a measure of independent oversight.

The Enterprise Constitution would be of considerable strategic significance to the work and success of the Enterprise. Its purpose would be clearly stated. The objectives clause of the 19th century company Memorandum of Association was supposed to do this but, over the years, this clause has become so broad that it now often allows a company to carry out most activities within the law.. Indeed some jurisdictions no longer require an objects clause in a company Memorandum of Association. Although, the UK Charity Commission do insist on a clear statement of charitable purpose prior to registration. By identifying its purpose, its Enterprise Constitution would also clarify the stakeholder sectors involved.

For large, complex Enterprises, probably operating in many jurisdictions, the Constitution would probably be detailed and lengthy: for smaller enterprises, with activities similar to many private companies, charities, and clubs, the Constitution might be relatively simple and short. Enterprise Constitutions could be amended if and when circumstances changed.

The Stakeholder Forum

The Stakeholder Forum has representatives from each stakeholder sector. Their number and method of appointment will be determined by Enterprise law and each Enterprise’s own Constitution, reflecting the purpose, scale of each Enterprise. The role of the Stakeholder Forum is to nominate and elect the stakeholder directors to the Board of Directors, and to advise that board.

The Stakeholder Forum does not have the powers of a supervisory board in the two-tier board in the shareholder governance model: it does not have the power to hire and fire executive directors. Its role though advisory, is likely to be significant, because it reports to its constituent stakeholder sectors. The Stakeholder Forum is a fundamental cog in the Enterprise governance mechanism.

An underlying problem in any stakeholder governance model is the potential conflict between the objectives of each stakeholder sector: higher wages, lower customer prices, better supplier terms, higher interest rates, more expenditure on the environment and society. It is important to avoid sub-optimisation; that is the achievement of the goals of one sector to the detriment of the interests of the whole. It is the role of the Stakeholder Forum to resolve such issues and
work with the Board of Directors accordingly. Each Stakeholder Forum appoints its own Chair from among its own members on terms within the Enterprise constitution.

Appointing Stakeholder representatives to the Stakeholder Forum

The choice of representatives to serve on the Stakeholder Forum would hinge on the Constitution of the Enterprise, which reflects its size, purpose, and structure. In relatively small enterprises the Stakeholders can be identified, meet, and choose their Forum members. In larger Enterprises, formal procedures would be needed to identify and give a voice to Stakeholder Sectors.

The Board of Directors

The Board of Directors consists of the Stakeholder Directors, the Executive Directors, and Independent Outside Directors, in number or percentage required by the Enterprise Constitution. The Independent Directors and the Executive Directors are nominated and appointed by the Board, advised by its Nomination Committee, if it has one.

The role of the Board is to ensure effective governance and management of the Enterprise: in other words, to achieve the Enterprise objectives in the long-term, while meeting other governance issues as they face the organisation. Typically, this would involve formulating strategy, setting policies, supervising management, and being accountable, working with and through the chief executive (by whatever name that role is known) and the top executive team. This is similar to the responsibilities of boards in the shareholder governance model, except reporting to Stakeholders through the Stakeholder Forum rather than reporting to the shareholders.

Executive Management

No changes are needed, under the stakeholder governance model, to management strictures or processes. The management report to the Board, through their chief executive and the senior executive team, particularly any executives who are members of the Board.

Overall, the aim of Stakeholder Governance is to allow the Enterprise to work for the benefit of every Stakeholder.

The process of Enterprise governance

Enterprise governance has many of the attributes of shareholder governance; the obvious distinction being that power has shifted from shareholders to stakeholders. The essence of Enterprise governance needs to:

  1. Define Enterprise Stakeholder Groups
  2. Identify specific Enterprise Stakeholders
  3. Enterprise Stakeholders appoint their representatives to the Stakeholder Forum
  4. Stakeholder Forum nominates and appoints their Stakeholder Directors to the Board of Directors
  5. Board of Directors appoints Executive Directors
  6. Board of Directors nominates and appoints Independent Non-executive directors
  7. Board of Directors governs the Enterprise, working through the Chief Executive and Executive management
  8. Board of Directors reports to the Stakeholder Forum, as required by the Enterprise Constitution, in accordance with Enterprise law

Considering each of these stages in detail:

Defining Enterprise Stakeholder Groups

Stakeholder groups will vary depending on the type of Enterprise and its purpose. All Enterprises are likely to have employees, suppliers, and sources of finance, whereas a retail store will have customers, a hospital its patients, and a football club its supporters. The Constitution of each Enterprise would specify the Stakeholder Groups relevant to its activities.

Identifying specific Enterprise Stakeholders

Enterprise Law would provide rules to identify all stakeholders in each of their Stakeholder Groups. Small Enterprises may be able to identify each individual stakeholder. Larger, more complex Enterprises would follow the requirements of Enterprise law and their own Constitution to determine representatives for each Stakeholder Group. No doubt, organisations would appear to represent specific Stakeholder Groups: interest groups to represent suppliers or customers, trades unions and other bodies to support the interests of employees, and so on. Enterprises would follow the requirements of Enterprise Law and their own Constitution to determine who is a member of each Stakeholder Group. It must be recognised that the interests of different Stakeholder Groups are not synonymous, indeed they may conflict.

Appointing representatives to the Stakeholder Forum

Having identified specific stakeholders, each Enterprise would follow its Constitution and Enterprise Law to ensure that appropriate representatives were appointed to its Stakeholder Forum. Enterprise Law would need to cover the rights of stakeholders to be recognised and to appeal.

Appointing Stakeholder Directors to the Board of Directors

A primary duty of the Stakeholder Forum would be to nominate and appoint Stakeholder Directors to represent each Stakeholder Group on the Enterprise Board of Directors. Such Directors would be appointed for a given period, in line with the Constitution. Subject to Enterprise Law, Stakeholder Directors might be eligible for re-appointment, in which case the Stakeholder Forum would again act.

The activities of Stakeholder Forums, such as appointing the Chair, meeting notices and procedures, minutes and accountability, would need to be covered by Enterprise law, so that a Stakeholder Forum could not be dominated by a Stakeholder Group, which had the scale, the influence, or the wealth. The balance of power between the representatives of Stakeholder Groups would have to be addressed by Enterprise law, to ensure that no group could dominate, but adequate recognition was given to legitimate interests. The law would also have to cover potential conflicts of interest.

Appointing Executive Directors

On incorporation, the first Executive Directorships would be created by the founders of the Enterprise. Thereafter, the responsibility for the appointment, re-appointment, and should it be necessary, the removal of Executive Directors would be the responsibility of the Board of Directors. This process would be similar to the appointment and approval of directors of a company with shareholder governance.

Board of Directors appoints Independent Non-executive directors
Independent non-executive directors would play a fundamental role in the governance of Enterprises, just as in shareholder governance. Independent directors can bring advice, experience, strategic insights, and above all critical oversight and supervision to board deliberations.

The choice of independent directors would be critical, and the use of a board nomination committee, possibly supported by external advisers, might be desirable.

Board of Directors governs the Enterprise

The Board of Directors is at the heart of stakeholder governance, just as in shareholder governance. In line with its Constitution, the Board would be responsible for formulating Enterprise strategy, ensuring that appropriate polices and plans were made, and that executive management was achieving the desired performance, working closely with and through the CEO (by whatever name the post was known) and top executive management.

Each Board would appoint one of its members to chair the Board, subject to its Constitution and Enterprise Law.

Board of Directors reports to the Stakeholder Forum

The Board is responsible to the Stakeholder Forum for the overall behaviour and performance of the Enterprise. Regular reports on financial, operating, environmental and societal performance would be published, in line with the Enterprise Constitution and Enterprise Law.

Creating an Enterprise

Essentially, there are three ways for an Enterprise to be created:

  • Incorporation by founding entrepreneurs or other interested parties
  • Conversion of a private limited company or other corporate entity, with members’
  • agreement
  • Conversion from a public limited company, through a share buy-back or other arrangement with shareholder agreement

Unincorporated entities, such as associations, clubs, and societies, should find it relatively straight forward to incorporate as an Enterprise. The members would be a vital Stakeholder Sector. Existing rules and procedures would be incorporated into the Constitution, which would also define the Enterprise purpose, identify its other Stakeholder Sectors, and add any other requirements of Enterprise law. Some charitable organisations might be in a similar situation.

Wholly-owned subsidiaries in a group should find re-incorporating as an Enterprise straight forward, with the parent company becoming a primary Stakeholder. Where subsidiary and associate companies in a group have shareholders in addition to the parent company, their agreement would be sought to replace the value of their shareholding with bonds or another financial instrument.

In a family company, with shares held by family members, incorporation as an Enterprise, these family members would become a Stakeholder Sector, with the Constitution drafted to give that Sector power over the Enterprise. Meetings of the ‘family stakeholder sector’ could also serve as a family council, to resolve issues between branches of the family involved in management and those not.

Companies limited by guarantee are incorporated, predominantly by not-for-profit entities such as charities, historic projects, arts and crafts societies, and academic and scientific institutions. Not having shareholders, companies limited by guarantee already have some of the attributes of an Enterprise. The guarantors of the company would be a Stakeholder Sector.

Where an employee-owned company incorporated as an Enterprise, the employee shareholders would form a Stakeholder Sector, with the Constitution defining their rights and responsibilities.

A state-owned company, having the state as its sole shareholder should have little difficulty in incorporating as an Enterprise, indeed in China state companies are already called ‘State Owned Enterprises.’

An entity incorporated under its own state act, such as the English National Health Service, may be able to incorporate as an Enterprise by embracing the requirements of its foundation Act into its Enterprise Constitution. An entity incorporated under a charter, such as the Institute of Chartered Accountant in England and Wales, might be able to incorporate as an Enterprise, by writing the terms of their charter into their Enterprise Constitution. Such an Enterprise would clearly identify the role of their chartered body and the other stakeholders involved.

The UK recently introduced a new type of limited company – the Community Interest Company (CIC), whose purpose was to benefit the community rather than private shareholders. The CIC Regulator requires a corporate constitution that includes a ‘community interest statement’, explaining what the business plans to do and an ‘asset lock,’ which is a legal declaration that the company’s assets will only be used for its social objectives, and setting limits to the money
it can pay to its shareholders. The Enterprise concept could readily embrace CICs.

However, public, listed companies would represent a very significant Enterprise group. Though much fewer in number than other corporate entities – private companies and the wide range of other corporate entities – the governance of the public company is of vital significance, as we have already seen. Indeed, the corporate governance codes and most other interest in the subject to date has been about the governance of public companies. Unless the Enterprise model applied to entities in which the financial markets could invest, the concept of Stakeholder Governance would have failed.

Creating a public Enterprise

The proposed Enterprise Law would include provisions for the incorporation of Public Enterprises able to offer investment opportunities to the public and the market. Safeguards in the law would include requirements for registration, investor protection, and reporting.

A range of financial instruments is likely to be designed by the financial institutions for their Enterprise clients. Some might provide for participation in the added-value created by an Enterprise; others could offer interest only, the rate depending on perceived risk and market interest. Terms could include provision for payments, related to profit. These Enterprise financial instruments could be traded, probably through existing stock exchanges, their market values reflecting Enterprise performance, its discounted future value, and market conditions.

Financial institutions, attracted by significant fee income, are likely to produce imaginative and entrepreneurial financial products to generate capital for the Public Enterprise market. Fundamentally, these financial instruments would be debentures (for more on debentures see: What is a debenture and what are the risks? UK Government Gazette:
https://www.thegazete.co.uk/insolvency/content/102414), which give security over the Enterprise’s assets but do not render the holder liable for Enterprise debts. In practice, the financial instruments offered by Enterprises are likely to have a variety of names: but for simplicity, in this treatise they will be referred to as ‘debentures’.

An Enterprise intending to invite the public to invest in it would publish its Constitution, which would include debenture holders as a key Stakeholder Sector, defining their rights to be represented in the Stakeholder Forum. The Constitution would also outline the Enterprise’s purpose, including the intention to create long-term wealth for the benefit of stakeholders.

Creating a start-up Public Enterprise would be similar to making an IPO (Initial Pubic Offering) for a public company, with similar safeguards for investors. Converting an existing listed, public company would require the approval of shareholders, who might be offered a share buy-back and reinvestment scheme, or a conversion from shares to debentures on terms that reflected the current value of company’s shares and the future potential as an Enterprise.

The fixed assets and net working capital of a public company are typically funded by shareholders’ equity reserves, and any borrowings. An Enterprise would be funded by Enterprise debentures, reserves and any other borrowings. Financial gearing (leverage) would acquire a new meaning.

Who would actually own the enterprise?

This appears to be a most significant question, because it raises the fundamental difference between stakeholder capitalism and shareholder capitalism. To those committed to shareholder governance, this question will seem vital: in fact, for the enterprise it is irrelevant. With no shareholders, the enterprise is not owned: like a company limited by guarantee, the entity owns itself.

When an Enterprise is bought or sold, title to the entity, based on its constitution and a valuation based on its audited financial accounts, would be transferred, in accordance with Enterprise law. Should an enterprise be wound -up, any value remaining, after investors and other creditors had been repaid, would be distributed in line with the enterprise constitution, in line with enterprise law, and subject to the agreement of the stakeholders. Similarly, the enterprise constitution and enterprise law will cover how an enterprise that has failed will be wound-up. The rights of employees who lose jobs, creditors who lose money, and investors who lose funds will be determined by relevant law.

How would Enterprises be regulated?

The proposed Enterprise Act would create the regulatory framework in each country. In some jurisdictions, the oversight of Enterprises might be passed to the existing companies’ registry and financial regulatory authorities. (In the US, the Securities and Exchange Commission for Public Enterprises and State regulatory bodies for other Enterprises: in the UK Companies’ House, the Financial Control Authority and the Financial Reporting Council). In some jurisdictions, however, the demands of Enterprise regulation may require the formation of a new Enterprise Regulation Authority, with appropriate reporting and control procedures.

On Enterprise corporate groups

Enterprises could be organised in groups, similar to corporate groups in shareholder governance; but instead of one company owning shares in another, in Enterprise groups enterprises would form legal relationships to achieve agreed outcomes. In other words, enterprise groups would be based on relationship not ownership. Enterprise groups could be formed at various levels, but unlike corporate groups based on ownership the rationale for the relationships would have to be clearly and legally identified.

Enterprise governance in practice

Some examples of the practical application of enterprise governance show the widespread potential benefits of enterprise governance.

  • Multi-national companies typically operated through groups of subsidiary companies. If the parent company remains a limited company with shareholders, while wholly-owned subsidiaries were incorporated as enterprises, each subsidiary would relate to its own stakeholders, while the parent company maintained overall control as the provider of overall group governance, group management, and finance.
  • Family companies, particularly those with some family members involved in management and others not (often the case in family companies in the second generation) could reach agreement in stakeholder sector discussions, before issues reached the board
  • The constitution of a charity would clarify its purpose and identify all of its stakeholders and their respective powers
  • The millions of associations, clubs and societies, if incorporated as enterprises, would share a single, legal, and well-understood form of governance
  • Professional institutions and societies incorporated as enterprises would have a clear governance relationship with their members and other stakeholders
  • Many professional football teams in Europe and the UK and other sporting clubs in the United
  • States are incorporated as shareholder companies, some owned by rich individuals. A few of the top UK and European football clubs planned to form a European Super League, excluding other clubs. Had they been enterprises, this ill-fated venture would not have been launched, because the hostility of supporters and government would have been known in advance.
  • Partners in a partnership are liable for partnership debts: incorporated as enterprises, they would not – creditors knowing that they can only look to the enterprise to meet their claims
  • A joint venture between two other companies or entities could be incorporated as an enterprise, with the joint venture partners recognised among the stakeholders
  • Academic bodies, such as schools, colleges, and universities, could be incorporated as enterprises, with the staff and the student body being among the stakeholders
  • Hospitals, medical practices, and other health services around the world, even though profit-orientated, could benefit from incorporating as enterprises, because their stakeholders would include patients. The National Health Service (NHS) in England already has a sophisticated corporate governance system, which establishes and monitors performance of hospitals. doctors, practices, pharmacies, dentists, and other elements of this nation-wide free service. The NHS is currently seeking to widen involvement in its governance to embrace mental health and other parts of the social care system and voluntary services to reflect the overall impact on peoples’ health. Enterprise governance would meet this challenge.
  • Retail co-operative societies would include the customers among their stakeholders. Cooperatives created for the mutual benefit of members in bulk buying or sharing expensive equipment, for example, farmers, would have those members as stakeholders
  • Some religious organisations might also find Enterprise governance useful, including the clergy and the congregation among the stakeholders
  • Coalitions, federations and similar groupings of other corporate entities might also find enterprise governance valuable for establishing and maintaining relationships
  • The railways in Britain have had a chequered governance history – from separate railway companies running on their own networks, nationalisation, partial de-nationalisation with franchised train operators running on a rail infrastructure provided by another company, which is virtually funded by the UK Treasury. Now a further reorganisation is planned. The enterprise governance model would offer the newly proposed Great British Rail organisation to run the infrastructure of the rail network, with private companies running the trains, a governance solution, with the key stakeholders, including passengers, employees, the government and the operating companies all involved.

If the United Stated enacted enterprise law at the Federal level, for the first time, country-wide organisations could be recognised, governed by their stakeholders, including the states where they operated, as well as Federal authorities. If individual states adopted enterprise law, key stakeholders would include that state, together with representatives of any other state involved in its work and Federal authorities.

In China, the enterprise governance model might prove particularly useful. When the Chinese authorities decided in 1999 to shift to a market-driven economy, there were no companies. The production of goods, the provision of services, including education, health, and housing were the responsibility of towns and city governments. So, companies act was passed in 1994, revised in 2006, modelled on the Western shareholder model. The assets needed by
each company had to be identified, valued, and balance sheets created. These companies were state-owned enterprises. Private companies were also allowed. A minority of the shares in some were floated on the Shanghai, Shenzen, and Hong Kong stock exchanges, and subsequently a few listed in New York.

Corporate governance in China borrowed elements from both the two-tier German and the unitary board Anglo-American models. A supervisory board is required, with employee representation and often chaired by a local Party member. The executive board, however, also has independent outside directors. With a single-party national government, corporate governance has unique Chinese characteristics in relations with government, at all levels.

Sir Adrian Cadbury, who wrote the world’s first corporate governance code, chaired the Board of the family Cadbury Chocolate Company. Had that company been an Enterprise, instead of a listed public company, the American Kraft company could not have succeeded in their hostile bid for Cadbury Chocolate, because there would have been no shares for them to acquire.

The governance of major public companies, with minority shares listed in China and abroad, would be influenced by its key stakeholders including its top management, employees, suppliers, customers, investors, and ‘the people’ through the Party and the government at local, industry, and state levels. China might be among the first to recognise the value of the enterprise governance model.

Pros and cons of Enterprise stakeholder governance

No doubt the reaction of many of those involved in shareholder governance will dismiss Enterprise stakeholder governance as irrelevant, unimportant, and unnecessary: after all they benefit from the present system in reward and reputation. Arguments advanced against stakeholder governance might include:

  • Shareholder governance has served society for over one hundred and fifty years, producing enormous employment, economic growth, and wealth: leave it alone
  • The market for equity shares is attractive to fund managers and other investors wanting to pit their investment skills against the market to make money, particularly private equity investors and hedge funds
  • Many directors believe that their role is to create wealth for their investors while satisfying other stakeholders
  • Some directors reject corporate societal responsibilities, arguing that boards are not qualified or mandated to make decisions about environmental or societal matters: these are the responsibility of government, who should legislate to achieve required corporate behaviour
  • Ongoing efforts for companies to measure and report environmental, societal, and governance matters demonstrates companies recognition of their commitment to stakeholders
  • Some economists and corporate governance experts believe that the threat of predator take-over (the market for control) provides an essential discipline on weak or overconfident boards

On the other hand, some directors of public companies might welcome reincorporation as an Enterprise to avoid predator challenges for control. The other side of that argument, of course, is that Enterprise governance would remove the overriding power that shareholders currently wield, which could slow investment and damage stock markets.

However, more positive advantages in Enterprise Stakeholder governance will be seen by others, including:

  • Enterprise governance offers millions of not-for-profit organisations and private companies a balanced constitutional identity and a justifiable power base that would involve and legitimise relationships with all those involved with the Enterprise
  • For public listed companies, being recognised as an entity that accepts a responsibility to all of its stakeholders, including the environment and society, could add value to the Enterprise, and to society
  • Some investors will see the attraction of investing in Enterprises, replacing the possibility of short-term gain with a higher likelihood of longer-term growth and stability
  • Society may reward enterprises that show stakeholder and societal concern through taxation and other incentives
  • Pressure on incompetent directors or inept boards would come from the stakeholders, meeting in the Stakeholder Forum, more directly than potential adversarial predators of a public company
  • Societal pressures for representative stakeholder involvement, already directed against shareholder governance, are likely to grow
  • Environmental and societal pressures will continue to grow, and stakeholder governance is more responsive than shareholder governance. Obviously, the membership and balance of the Stakeholder Forum and the performance of the Stakeholder Directors would be crucial.
  • Not-for-profit organisations, formally governed by their members, find their boards have become self-perpetuating, the incumbent directors nominating new directors. Members of the organisation, though entitled to nominate and vote on new board members at members’ annual meetings, actually have little influence. There are millions of such organisations (these organisations include alliance, association, body, brotherhood, circle, coalition, consortium, federation, fellowship, fraternity, group, guild, institution, league, lodge, order; organization, ring, set, society, sorority, or union). Incorporation as an Enterprise would ensure that the Board of Directors reflected Stakeholders’ interests.

Moving on

This treatise has assumed that stakeholder capitalism is desirable and the creation of Enterprises acceptable. But there are underlying philosophical issues that need to be recognised. Some indeed might argue that ’stakeholder capitalism’ is an oxymoron. Capitalists stake their money to make a profit: Lacking opportunities to risk their funds for speculative gain, some investors might cut the funds available to Enterprises, driving capital away from any companies re-incorporating as Enterprises. Of course, the Enterprise would be an alternative to, not a replacement of, limited companies and other forms of corporate entity.

Rather than shifting power over companies from capital to all stakeholders, some might rely on the law to direct corporate behaviour, using corporate accountability through reporting, to influence corporate behaviour to all those affected, including the environment and society. Others might point to the growth of philanthropic capitalism (such as the efforts of Bill Gates) to offset capitalism’s excesses.

On the other hand, proponents of stakeholder capitalism would point out that employees stake their livelihoods, contractual stakeholders stake their contractual relationships, and society stakes its future on corporate activity.

The joint-stock limited liability company was a mid-19th century invention, designed to attract capital from investors, without them becoming liable for the company debts. The law invented a corporate entity, with many of the legal attributes of a human – to own, employ, sue and be sued. Power over the joint stock company rests on ownership. Such a joint stock company would not be invented today, because the way of doing business has moved on. It would more likely be a type of legal entity in which power lay with those affected by it – its stakeholders. That is the theme of this treatise and the rationale for the Enterprise.

Moreover, the concept of stakeholder governance can be applied to every corporate entity, whatever its purpose, membership, or current constitutional form. In other words, corporate governance is about the way power is exercised over corporate entities – not only public companies, which is what many people still think. The acceptance of stakeholder governance would add legitimacy to all corporate entities in society.

This treatise offers no more than the bare bones of an idea. Much more work would be needed to strengthen the skeleton, perhaps adding more limbs, create the necessary organs, flesh it out and give it some muscle. Hopefully, the challenges will be pursued in the academic, business, and legal worlds: as well as among those directly interested in corporate social responsibility, shareholder capitalism, and shareholder democracy. Hopefully, this paper will provoke discussion. Certainly, the idea would bring decision-making closer to those directly impacted by it. If adopted, some countries might encourage stakeholder governance with grant incentives or tax benefits. There is pioneering work to be done.

In the generation of new thinking, the author readily admits to being among the ‘hewers of wood and drawers of water,’ not an advocate. But a pebble dropped in the meme pool can wash ashore significant waves in due course: it happened once before with the phrase ‘corporate governance.’

Bob Tricker
July 2021

The Future of Corporate Governance – a personal odyssey | Part 2: Redefining corporate governance and finding its paradigm

What a paradigm needs to be

If we are to discover a unifying paradigm for corporate governance, we need to agree, at the outset, what we mean by a ‘paradigm.’ The definition adopted in this paper is: ‘the framework of basic assumptions, theories, and ways of thinking, methodologies, principles, and practices recognised and accepted by the relevant academic, professional, and other interested communities.’ In other words, we need a perspective on corporate governance that unites all of the various alternative viewpoints and ways of thinking about it.

Perspectives on corporate governance

Experts’ definitions of corporate governance give an indication of the different perspectives on the subject. These various insights can be classified into five broad categories:

– Insights into individual and interpersonal behaviour
– direction and control, processes and power
– the stakeholder and societal perspective
– the legal perspective
– the economists’ perspective

Anyone who has served on a governing body will have experienced the significance of individual and interpersonal behaviour, on that board or committee. They will be aware of the effects of personal mindsets and motivations, personalities and foibles, prejudices and political skills of individual players. They will also have experienced the effect of interpersonal relations, political power plays, and the importance of leadership. However, this field of interest is
poorly represented in the corporate governance literature; probably because of boardroom confidentiality and the difficulty of researching human interactions without influencing the situation. Psychological studies on human interactions and sociological perspectives, such as class hegemony theory, focusing on groups of directors, provide insights.

However, the world’s first corporate governance code, the Cadbury Report (1992), took a simple direction and control view:

Corporate governance is the system by which companies are directed and controlled.’

The Cadbury Code only applied to UK public companies listed on a stock exchange. Other commentators also restrict their insights to listed companies:

Corporate governance is the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, how the risk and returns from the activities they take are allocated.’ [Blair (1995)]

However, Cadbury was well aware that corporate governance involved far more than the simple direction and control procedures that were used. In conversations with the author, Cadbury emphasised that his report only covered one aspect of the subject. His broader stakeholder and societal view appears in a paper he wrote subsequently for the World Bank:

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability and stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.’ [Cadbury (2000)]

The Organisation for Economic Cooperation and Development took a stakeholder and societal view in their broad explanation that:

Good corporate governance helps to build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.’ [OECD website (2021)]

The OECD Principles of Corporate Governance also take a stakeholder and societal perspective in their definition:

A good Corporate Governance regime helps to assure that corporations use their capital efficiently. Good corporate governance helps, too, to ensure that corporations take into account the interests of a wide range of constituents, as well as of the landscape in which they operate, and their boards are accountable to the company and its shareholders. This, in turn, helps to ensure that corporations operate for the benefit of society as a whole. It helps to maintain the confidence of investors – both foreign and domestic – and to attract more long-term capital.’ [OECD (1999)]

The OECD reinforced their stakeholder view that:

Corporate governance is ‘a set of relationships between a company’s board, its shareholders, and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of attaining those objectives, and monitoring performance, are determined.’ [OECD (1999)]

The OECD Principles have been taken as a benchmark by many countries and organisations to create their own corporate governance guidance and rules.

Some scholars see corporate governance as the exercise of process and power:

Corporate governance refers to the structures, processes, and institutions and organisations that have power and control of resources among participants.’ [Davies (2005)]

Corporate governance may be defined broadly as the study of power and influence over decision-making within the corporation. Existing definitions of corporate governance are closely tied to different paradigms or ways of conceptualizing the organization or firm.’ [Aguilera and Jackson (2010)]

Mallin presented corporate governance as a process linking the external world of shareholders and other stakeholders with the internal world of corporate management:

Corporate governance is concerned both with the shareholders and the internal aspects of the company, such as internal control, and the external aspects, such as the organization’s relationship with its shareholders and other stakeholders.’ [Mallin (2016)]

The legal perspective, rooted in company law, plays a fundamental role in defining corporate governance. After all, companies are artificial entities, created under the law and regulated by law. Some call this the stewardship view, or stewardship theory, recognising that in the legal model of the company, shareholders own shares in the company, which gives them rights under that company’s constitution (its memorandum and articles of association), including the
right to nominate and appoint directors to be stewards of shareholders’ interests. Ownership is the basis of power in the legal model.

When corporate governance appeared as a topic, the world of jurisprudence embraced it as their own. Some university law faculties created corporate governance centres or research groups; law journals carried corporate governance papers, and law school corporate governance courses appeared.

The economists’ perspective stems from research by economists Jensen and Meckling (1976), who developed a theory of agency to describe the relationship between shareholders (the principles) and directors (their agents); although they did not use the phrase ‘corporate governance.’

Agency theory has made a significant contribution to corporate governance thinking. The majority of research papers published on the subject have used agency theory to demonstrate relationships between various structures and systems of corporate governance and corporate performance, typically using data published by publicly-listed companies.

This research methodology does not require any contact with directors or boardrooms, because it is at a level of abstraction above the behavioural aspects of the subject. Moreover, the proposition that corporate governance can be understood through a simple principle/agent duality, ignores boards’ responsibilities to other stakeholders, who might be affected by corporate decisions.

Agency theory has been blamed for the short-term maximization of shareholder value alleged in some public companies [Bower and Paine (2017)]. However, this opinion assumes that agency theory has had more influence in board decisions than is likely.

Some scholars have tried to link direction and control with stakeholders and society:

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the
.’ [Chen (2021)]

Although other scholars take a narrower view:

Corporate governance deals with the way in which suppliers of finance to corporations assure themselves of getting a return on their investment.’ [Sheifer and Vishny (1997)]

Monks and Minow succeed in combining the process element with the stakeholder perspective, whilst adding a risk component:

In essence, corporate governance is the structure that is intended to make sure that the right questions get asked, and that checks and balances are in place to make sure that the answers reflect what is best for the creation of long-term,
sustainable value…Corporate governance (is) properly understood as an element of risk – risk for investors, interests may not be protected by ineffectual or corrupt managers and directors, and risk for employees, communities, lenders, suppliers, and customers, as well
.’ [Monks and Minow (2004)]

Professional bodies, representing directors, auditors, and company secretaries, have also attempted to define corporate governance. Consider the definitions offered by various professional institutions.

The Institute of Chartered Accountants in England and Wales took a direction and control view, emphasising the work of the board:

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and it is to be distinguished from the day to day operational management of the company by full-time executives.’ [ICAEW (2021)]

The Institute of Chartered Secretaries and Administrators also saw corporate governance as the procedures by which companies are directed and controlled:

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled.’ [ICSA (2021)]

However, the Institute of Chartered Secretaries and Administrators did expand that brief definition with a stakeholder and societal perspective:

Corporate governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is, in essence, a toolkit that enables management and the board to deal more effectively with the challenges of running a company. Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced.’ [ICSA (2021)]

The Institute of Chartered Secretaries and Administrators also takes a societal perspective, when explaining that:

Governance at a corporate level includes the processes through which a company’s objectives are set and pursued in the context of the social, regulatory and market environment. It is concerned with practices and procedures for trying to make sure that a company is run in such a way that it achieves its objectives, while ensuring that stakeholders can have confidence that their trust in that company is well founded.’ [ICSA (2021)]

The Chartered Institute of Personnel Development took a process orientated view, seeing corporate governance as primarily being about supervising management, although they did recognise the stakeholder and societal aspects:

Good corporate governance is about effectively supervising the management of a company to uphold the company’s integrity, achieve more open and rigorous procedures and ensure legal compliance. Ultimately it should also promote good relations with stakeholders, including shareholders and employees.’ [CIPD (2021)]

The Stakeholder and societal perspective sees corporate governance from the perspective of the company in society, being concerned with corporate relationships with all of its stakeholders – shareholders and other providers of finance, employees, suppliers and those in the supply chain, customers and those in the distribution chain, and society at the local, national and, if relevant international levels.

King IV, the fourth South African Corporate Governance Code, from the Committee chaired by Judge Mervyn King, made an important contribution to the stakeholder and societal perspective.

… organisations are not merely responsible for the economic ‘bottom- line’ but critically need to consider the societal and environmental impacts and outcomes of their operations.‘

So, we have definitions of corporate governance from multiple sources, seeing the topic through a multitude of different lenses. Professionals, such as lawyers and accountants write papers and books for other professionals, directors for other directors, and academics for other academics. Each perspective has its own theories, ways of thinking, methodologies, principles, and practices: each has its own unique paradigm.

It is not that any of these definitions are wrong, rather that they are incomplete. They offer insights at different levels of abstraction. It is as though each set of commentators has hewn out their own tunnel, at a chosen level, and is busily extending that rockface. Those in the tunnel communicate with each other: they do not connect with those in other tunnels. What is needed is a map of the mine.

Mapping the mine

To establish a unifying paradigm and new definition for corporate governance, we need to find a way to integrate every perspective – the simple direction and control view, the legal perspective, the behavioural view, the economists’ perspective, the processes and power view, and the stakeholder and societal perspective. In other words, we need to encompass the views of lawyers, accountants, economists, and other academics, regulators, as well as those actually
involved in governing and their advisers. Quite a challenge!

In the Cambridge University Press monograph on The Evolution of Corporate Governance, the author made a first attempt to define such a paradigm, using systems theory. [Tricker (2021)].

A system is a way of describing sets of parts and procedures that work together to achieve an outcome: for example, a country’s railway system, the budgetary control system, or a system of government. Every system is a construct defined by its purpose, boundary, and components or level. Defining a system’s boundary determines what is seen as within the system and what is in that system’s environment. The system boundary also determines that system’s inputs and
outputs, needed to achieve its purpose. A system’s level describes the detail of the components and processes of that system. One system may have component sub-systems, which can themselves be seen as separate systems.

The various definitions of corporate governance, despite their apparent disparity, can each be seen as sub-systems of an overall meta-level corporate governance system. Each perspective focuses on corporate governance at a different level, with its own system boundary. The five different corporate governance perspectives already identified, reflect five different system levels:

System level one, the bottom level, focuses on personal and inter-personal behaviour of the members of a governing body, as individuals and as a group. This provides insights into personal and group behaviour. It highlights motivations and mindsets, personalities and values, political skills and prejudices. At this level, the relevant data includes the characteristics of each person: their personality, motivations, mindset, health, age, gender, race, education, professional and other qualifications, religion, politics, family background, value system, experience, inter-personal skills, inter-personal abilities, and other individual attributes. Psychological, sociological, and other behavioural theories can provide insights at this level. Neither stewardship theory nor agency theory are interested in this level, nor are the
stakeholder and societal perspectives. Yet this level highlights some of the most significant driving forces in corporate governance.

System level two covers direction and control, process and power exercised by the governing body. This level includes the board and board committees, with their executive and nonexecutive members, the company secretary, the external auditors, and the members of the corporate entity. It embraces the accounting, financial, and other information and control systems that enable the board to supervise management, fulfil its legal responsibilities, and be
accountable to members and regulators. The codes of sound corporate governance practice, like the Cadbury Report, are at this level.

System level three covers the legal perspective, sometimes called stewardship theory, because it covers the relationship between the governing body and the members of that entity, its shareholders in the case of a company. It also involves the external auditors, the company secretary, and other officers covered by the legislation relevant to that entity.

Applied to limited-liability companies, the stewardship model recognises ownership as the basis of power over the company, with increasing shareholder wealth, measured by profit, the long-term objective. The principles of company law and financial accounting provide the theoretical underpinning.

System level four embraces the economists’ perspective. Agency theory recognises the basic structure and role of the corporate entity under the law, but questions directors’ motives, questioning whether directors can really be trusted to act as disinterested stewards of shareholders’ interests. Indeed: the theory posits that they cannot, self-interest being a
potential motivator of board behaviour.

System level five focuses on stakeholders and society. The corporate entity is seen in the context of its stakeholders, including its contractual stakeholders, such as its members, employees, suppliers, distributors, agents and customers, and its non-contractual stakeholders, including interaction with competitors, government, the media, trade unions, quangos and other entitles and individuals that could affect or be affected by the corporate entity.

Recognising that different perspectives on corporate governance, in both theory and practice, are seeing the subject at different levels of abstraction and within different system boundaries provides an over-all meta-theory that shows the relationships between the different perspectives. It covers each of the levels at which work is going on in the corporate governance mine mentioned earlier; indeed it provides a map of the mine.

Clarke (2021) called for a paradigm that would unify corporate governance thinking:

As the adequacy of the existing dominant paradigms of corporate governance is increasingly challenged, the search for coherent new paradigms is a vital task for corporate governance in the future.’

The overview, developed here, provides such an integrating paradigm. None of the existing theoretical and practice-orientated perspectives are complete in themselves, combined they form a universal corporate governance paradigm.

The processes and principles of corporate governance

Many of the definitions we have reviewed focus on the processes or procedures involved in corporate governance. Many stem from Cadbury (1992), who wrote that corporate governance was about ‘direction and control.’ From the literature it is possible to amplify this perspective on the processes involved into some principles:

  1. The constitution of an entity determines how the members of its governing body are nominated, elected, and when necessary, changed. The constitution gives that governing body powers to act on behalf of the members, to achieve the organisation’s objectives.
  2. The governing body is responsible to the members for ensuring that the entity has sound corporate governance.
  3. Sound corporate governance involves ‘direction’: that is the responsibility for setting the entity’s objectives and ensuring that strategies, policies, and plans are in place to achieve them, working with and through management.
  4. Sound governance also involves ‘control:’ that is the responsibility for ensuring that the entity’s reporting and control systems adequately supervise executive management and report on corporate performance to the members and other legitimate stakeholders.

Re-defining corporate governance

As this study progressed, through the evolution of practices and procedures, the impact of corporate governance codes, the cornucopia of research papers from case-orientated, economics, and legal perspectives, a recognition grew that: the phrase ‘corporate governance’ itself already contained its own definition: corporate governance is about the governance of corporate entities. But that statement of the obvious now needs elaboration in the light of the new five level paradigm. It ought now to be possible to produce a comprehensive new definition for the subject, embracing all the elements now seen to make up the concepts of ‘corporate’ and ‘governance.’

On corporate entity

A corporate entity is a body of individuals and/or other corporate entities formed for a specific purpose(s) under a constitutional agreement that identifies its name, membership, purpose, and the rules by which it will be governed and managed. A corporate entity has its own identity and an existence separate from its members. It has its own financial structure, assets and liabilities, and legal responsibilities. The key to a corporate entity’s identity lies in its constitution. For a limited-liability company, incorporated under the company law in the relevant jurisdiction, the constitution is the company’s memorandum of incorporation and articles of association. Corporate entities may also be incorporated under a statute from parliament, a government mandate, or a decree from the monarch. Some professional
institutions, universities and colleges, and public sector bodies are created this way. Other corporate entities may be formed under laws relevant to a specific sector, including charities, cooperative societies, savings and loan associations, and trade unions, with the relevant act providing the constitutional arrangements. Partnerships are formed under a partnership agreement, within the relevant partnership law. Similarly, many joint ventures are governed under their joint venture agreement. Other bodies (such bodies might be called an alliance, association, body, brotherhood, circle, coalition, consortium, federation, fellowship, fraternity, group, guild, institution, league, lodge, order; organization, ring, set, society, sorority, or union. https://knowhow.ncvo.org.uk/tools-resources/board-basics/tools-and-guidance/follow-thecode-of-good-governance#), including some associations, clubs, and societies are formed under little more than a set of rules that identify the entity’s name, membership, purpose, and the way it is to be run.

As we have already seen, the US Federal company regulation through the Securities and Exchange Commission (SEC) and the corporate governance codes around the world apply specifically to public listed companies. That remains the primary focus for many academic researchers and commentators on corporate governance.

However, it is now widely recognised that corporate entities, other than public listed companies, need to be governed. Indeed, it seems self-evident that, all corporate entities need to be governed, not just public listed companies. Evidence for this conjecture is not hard to find. The Institute of Directors in London published guidance and principles on the corporate governance of unlisted companies in the UK. There are, of course, thousands of times more such private unlisted companies than public listed ones, including family companies, subsidiary companies in corporate groups, and other entities incorporated as limited liability companies.

Many charitable and other voluntary organisations have appointed governance officers. The National Council for Voluntary Organisations (NCVO (NCVO represents charities, community groups, and social enterprises in England)) has produced a corporate governance code for members, explaining that:

Good governance in charities is fundamental to their success. It enables and supports a charity’s compliance with the law and relevant regulations. It also promotes a culture where everything works towards fulfilling the charity’s vision.’ [NCVO website (2020)]

The National Health Service (NHS) in England has developed a comprehensive system of corporate governance for this vast organisation, which administers medical services in England, including all general practitioners, hospitals, and specialist units, with 1.5 million employees.

The NHS England Corporate Governance Framework (120413-item6.pdf (england.nhs.uk)) is based on the concept that:

Good governance is essential to underpin the activities of NHS England, and its hosted bodies, as it strives to make decisions in the best interest of patients.’

The NHS Foundation Trust Code of Governance is our way of providing guidance to NHS Foundation Trusts to help them deliver effective corporate governance, contribute to better organisational performance and ultimately discharge their duties in the best interests of patients…we have also developed new regulatory tools (The provider licence and the Risk Assessment Framework), which have implications for how Trusts establish and report on corporate governance arrangements.‘

Based initially on the UK corporate governance code for public companies, the NHS code was radically updated in 2013 to include

‘…significant changes, including a new introduction, a new structure, and greater clarity regarding disclosure requirements.’

The fourth revision of South Africa’s corporate governance code, King lV (2016) recognised this situation, as already noted. Judge Mervyn King, Chairman of the South Africa’s Corporate Governance Committee, explaining the significant changes on the revised code, wrote:

All organisations, regardless of their form of incorporation, and their governing bodies … including public and private institutions, non-profit organisations, municipalities and pension funds.’

Accordingly, (the Code) now refers to “organisations” rather than “companies”; “governing bodies” rather than “boards”; and “those charged with governance duties” rather than “directors”.’
[Institute of Directors in South Africa, website (2021)]

The world’s first corporate governance code (the Cadbury Report) focused on the governance of listed companies, not least because the Cadbury Inquiry had been a response to a series of collapses of listed companies. Unsurprisingly, subsequent writing, research and other codes around the world also focused on the governance of listed companies. Indeed, the governance of public companies remains the primary focus for many commentators to this day.

However, we know now that all corporate entities need governance, whatever their purpose, constitutional form, membership, size, or location. Governance is essential to ensure the strategic direction, supervise management, and protect the members, whether those members are investors in a listed company, shareholders in a private company, or the members of a charity, a co-operative society, a professional institution, a university, or a trade union.

The ‘corporate’ in ‘corporate governance’ embraces every corporate entity. Such a broader perspective adds new dimensions to the study and the understanding of corporate governance and to its paradigm.

On governance

We turn now to ‘governance’ – the second half of the phrase ‘corporate governance.’ Of course, governance has long been studied at the level of the nation state. This is the world of constitutional lawyers and political scientists. Few of them have ventured into the world of corporate governance. However, some of the concepts developed in the field of national governance – politics, power, representation, and trust, for example – are relevant to corporate governance.

The literature of state-level governance emphasises the significance of the state’s constitution. Similarly, as we have seen, the constitution, under which a corporate entity is founded, identifies the rights of its members and the responsibilities of its governing body.

Another concept frequently discussed in state-level governance is power (‘executive power’, ‘arbitrary power’, ‘representative power’, ‘the power of the people versus the power of the state’ and so on). The concept of power also features in some of the definitions of corporate governance, that we have already considered, and is a sub-title in the first book with the title ‘corporate governance’: Corporate Governance – practices, procedures and powers in British
companies and their boards
[Tricker (1984)]

‘Power’ is an elusive idea: the power of a battery to light a torch, the power of engines to lift a plane, the power of a court to award the death penalty, the power of a speaker to influence a crowd, or the power of a governing body to direct and control its corporate entity. A pioneer of management thought, Mary Parker Follett (1918), offered a useful definition: ‘power is the ability to make things happen.’ Such an all-embracing definition covers the use (and the abuse)
of power that is seen in and around corporate entities.

The constitution of a corporate entity defines the powers, responsibilities, and duties of the governing body, and determines the rights, duties and powers of members. The ability of a governing body to ‘make things happen’ stems from the formal authority derived from the constitution. With that power, however, goes accountability; in other words, to accept responsibility for outcomes. As stewards of the members, the governing body has a duty to report regularly to those members, with financial accounts and other information, as required by the constitution and the law.

At heart, corporate governance is based on trust, beyond the constitution and the law. Members of an entity trust the members of their governing body to show integrity, be open and honest, and be reliable stewards of their assets and their interests. Inevitably, this calls for transparency in their dealings with the members.

The members of an entity (shareholders in a company, members of a co-operative, partners in a partnership and so on) also acquire rights and duties under the corporate constitution. Typically, this includes the right to nominate and elect members of the governing body, and the right to receive regular information on the performance of the entity. External stakeholders also have powers granted by their contractual relationship with the entity and rights given under the law.

Individual members of a governing body are given rights by the constitution; but they can also gain power from organisational position (such as being appointed chair), through leadership qualities, personal charisma, and political manoeuvring. Cabals and cliques among board members can exert power that is often undesirable.

Thinking about corporate governance in terms of trust, power, and accountability focuses on what corporate governance really means. Many of the definitions considered earlier, stemming from the Cadbury Code (1992), present corporate governance in terms of process – direction and control – ‘The system by which companies are directed and controlled.’ Thinking about corporate governance in terms of trust, power and accountability opens a new vista.

Redefining corporate governance

Having identified a unifying paradigm for the five levels of perspective on corporate governance and explored existing definitions, we can now attempt to redefine corporate governance, in a way that focuses on what corporate governance means, not what it involves and how it is done. A revised definition must cover all the thinking and the practice at each of the five levels of the paradigm discussed earlier.

A revised, all-encompassing definition might be:

Corporate governance describes the way trust is shown, power exercised, and accountability achieved in corporate entities, for the benefit of their members, other stakeholders, and society.

This definition covers thinking and practice at each of the five levels of the new paradigm discussed earlier.

The power of the members over, and their trust in their governing body are enshrined in the entity’s constitution, together with the power and accountability of the governing body. Contractual stakeholders – employees, suppliers and those in the supply chain, customers/clients and those in the delivery chain – arise from their contracts with the entity. The power of other stakeholders, including communities and states, hinge on the laws of the relevant

Accountability, in tris definition, involves more than may conventionally be understood by the term. To some, accountability is about reporting, hence the growing calls for greater transparency. But, in addition to providing information, accountability is about being held accountable. In other words, the process of explaining actions or decisions and receiving approval for them. Accountability is a two-way process.

So, where has this odyssey led so far? A set of basic precepts has emerged, in essence, that:

  1. Every organizational body, with an existence separate from its members is a corporate entity, whatever its purpose; membership, ownership, legal format, constitutional arrangement, size, location, domicile, history, or culture.
  2. All corporate entities need governing.
  3. Corporate governance is not management.
  4. Corporate governance determines the way power and authority are exercised over a corporate entity, and accountability shown.
  5. The governance of an entity is determined by its constitution. (memorandum and articles of association, charter, partnership agreement, joint venture agreement, rule book etc.)
  6. Corporate governance involves the relationships between the corporate entity and its members, managers, contractual stakeholders, other stakeholders, the community and the state.
  7. An all-embracing paradigm for corporate governance would recognise five levels of thinking and practice in the subject.
  8. A new overall definition for corporate governance could be that corporate governance describes the way trust is shown, power exercised, and accountability achieved in corporate entities, for the benefit of their members, other stakeholders, and society.

The twentieth century focused on management: the interest in the twenty-first is on corporate governance. In this treatise, we are now on the threshold of determining the underlying philosophy of a new subject – corporate governance – which will draw on, but be distinct from accounting, economics, jurisprudence, psychology, sociology, politics, and philosophy. We are also in a position to challenge the underlying 19th and 20th century assumptions about corporations – that ownership is the basis of power, to invent something better, more in line with the expectations and needs of the twenty-first century. But that must wait for part three of this paper.

Bob Tricker
June 2021

The Future of Corporate Governance – a personal odyssey | Part 1: Discovering corporate governance

Bob Tricker


A five-year research project at Nuffield College, Oxford, in the 1980s, led to the first book with the title ‘Corporate Governance.’ The 1994 Cadbury Report used the phrase ‘corporate governance’ in its seminal report. Corporate governance codes then appeared around the world, culminating in the OECD corporate governance code in 1999, which became an international benchmark, and was subsequently adopted by the G 20 nations. Interest in the subject blossomed, with research, publications, consultancies, leading to widespread acceptance of the field. The original focus on the governance of publicly listed companies widened to cover other types of corporate entity. Legal, economic, and other social sciences focused on the subject, but these different perspectives lacked a unifying paradigm. This paper has three parts:

Part I: Discovering corporate governance
Part 2: Redefining corporate governance and finding its paradigm
Part 3: Reinventing the corporation

A personal odyssey
Ever since Homer told the epic story of Odysseus’ voyage home from Troy, an odyssey has involved a journey. This story of the author’s search for the meaning of corporate governance has been a personal odyssey. Odysseus took ten years on his voyage: the author’s has taken forty-five years so far, and the journey is not yet over.

Part I

Discovering corporate governance

The Independent Director

The search began in 1977 with an invitation from the London office of the international accounting firm, Deloitte, Haskins and Sells (as it was then called) to study audit committees and consider their relevance for the UK. In the United States, listed companies had long been required by their regulator, the Securities and Exchange Commission (SEC), to form standing committees of the main board of directors (made up of independent outside directors), to act as a bridge between the board and the external auditor. This ensures that significant issues arising during audit were considered by a standing board committee, and not just resolved by the Finance Director. Deloitte, London hoped that similar audit committees could be introduced into UK regulations, not least because the existence of an audit committee could provide a defence against claims from shareholders of a listed company client that had failed. Shareholders often sued the auditors, rather than a bankrupt company, because they were more likely to receive damages from the auditors, who were insured.

The research into the board structure of companies listed in London showed that most did have non-executive directors. The conventional wisdom seemed to be that such directors were useful to give advice. But non-executive directors should always be in a minority: the executive directors should be in control. It was felt that up to a third of the board consisting of nonexecutive was probably about right.

The concept of independence in non-executive directors did not exist in the UK. Consequently, audit committees of independent, non-executive directors were not feasible. The resultant report was published [Tricker (1978)], with the title The Independent Director. The book was reviewed in the professional press: the idea of independent directors was not welcome in British boardrooms. There was no mention in the academic journals – the structure of bards was not of academic interest. Of course, subsequently, the Cadbury Corporate Governance Code [Cadbury (1992)] called for audit committees of independent directors, defining ‘independence’ with some care. But, unlike the SEC rules, which required conformance under Federal law, the Cadbury Code was voluntary, requiring listed companies to report conformance with the Code or explaining why, if they had not.

Management studies in Oxford

At the time of the independent director study, I was Director of the Oxford Centre for Management Studies, a residential facility, which prepared senior managers for an Oxford University Certificate in Management Studies (for more on management studies in Oxford, see Tricker (2015)). However, the Centre was not formally part of the University. Indeed, although the second half of the twentieth century had become the era of management – management consultants thrived, management gurus wrote management books, and management schools flourished – some members of Oxford University, particularly in the Economics Faculty, felt that ‘management’ was not an intellectually appropriate topic for university-level study. Indeed, the subject ‘management studies’ sat somewhere between basket weaving and hair-dressing as a vocational pursuit. Wright reported to the Social Sciences Faculty, following a visit to business schools in the United States [Wright (1962): Reproduced verbatim in Oxford Circus [Tricker (2015)]]. He reinforced the belief that the study of management was not academically respectable, describing the Harvard Business School as a ‘boot-camp,’ whose students acquired status by the enormous work load they endured, not the intellectual challenges they had experienced. He was amazed to find accountancy treated as an academic subject. The tortuous road that Oxford trod to reach its Saïd Business School has already been told [Tricker (2015)].

The Oxford Centre for Management Studies

The Oxford Centre for Management Studies (for the story of the Oxford Centre for Management Studies see Oxford Circus [Tricker (2015)], founded in 1965, was a company limited by guarantee. Its Board of Directors (called its Council) was large, outnumbering the academic staff of the institution. Half of the members represented the University, including two Heads of House (college heads), the balance being chairmen of eminent British companies.

The author was appointed Director of the Oxford Management Centre in 1971, and was the only member of the academic staff on the Council. The behaviour of some members of this board came as a surprise to the Centre’s Director: it was not what he had expected. Instead of the analytical and rational decision making that was being taught in the Oxford Management Centre, Council meetings were sometimes antagonistic, fractious, with relations between
members personal and political. The problem was that Council members’ perceptions of the Centre’s purpose differed: the academics expected the academic staff to do research, funded by business, and publish in refereed journals; the businessmen expected the Centre to be run like a business, financially self-supporting, funding itself by income earned from courses. These differing goals led to some acrimonious debates and dramatic personality clashes.

The behaviour of members of that board was not covered by conventional books on management. But, if it was not management, what was it? The offer of a five-year Research Fellowship at Nuffield College, Oxford, gave the author the opportunity to pursue an answer.

Research at Nuffield College, Oxford (1979 -1984)

Nuffield is a graduate college of Oxford University, devoted to the social sciences. Unfortunately, research into the work of boards of directors did not map readily onto the interests of other College Fellows. The political scientists were focused on politics at national, not corporate, level. The sociologists’ sights did not encompass the boardroom. The economists dismissed research into boards as ‘management studies,’ and considered corporate reporting as ‘accounting,’ which they treated with disdain [Wright (1962)].

There was an industrial relations group at Nuffield, led by Bill McCarthy (later to become Lord McCarthy in Prime Minister Harold Wilson’s retirement honours list), which considered business organisations, but their focus was on labour relations and trade unions. [McCarthy (1973)]. The nearest they came to the boardroom were studies connected with the British response to a draft directive from the European Economic Community, calling for worker directors on supervisory boards [Bullock (1977)].

Eventually, a research proposal did emerge: ‘to study the practices, procedures, and powers in British companies and their boards of directors.‘ The plan was to explore the structure of complex corporate groups, establish the structure and work of their boards of directors, and explore their relationships with shareholders and other corporate stakeholders. The intention was to discover something about the work of boards and board behaviour. A trust was formed to fund the research, sponsored by five British companies which, interestingly, was named the Corporate Policy Group (CPG), not the Corporate Governance Group, because ‘corporate governance’ was not a phrase then used. The CPG held occasional conferences in Oxford and London, with visiting speakers, and published working papers
[Tricker (1984)].

A sample of British listed companies was chosen for the research. Published company reports and company records, enhanced by interviews with executives and directors provided the basis for the study.

Research methodology

The research followed predictable steps: a survey of the academic and professional literature, a desk analysis of published company information to discover corporate groups’ structures, and confirmation and amplification of this data from interviews with directors and company secretaries. Interviews followed with chairmen (they were all men) and other directors of parent and subsidiary companies. Confidentiality was assured at the outset by agreeing that no company or person would be identified or identifiable in published material. Consequently, interviewees were quoted without attribution in the final report.

It soon became apparent from case notes that the expectations and perceptions of actors in the corporate drama were as significant as any study of formal board structures or routine board procedures. So, an effort was made to explore the ideas and experiences of respondents, as well as obtaining descriptions of board practice.

Position papers were drafted, describing board policies, procedures and practices that had been discovered during the research. Topics included the role of the board chair, the nature of accountability, the role of non-executive directors, and the responsibilities of subsidiary company boards and board committees.

Round table discussions were then held with small groups of directors, to discuss the position papers, providing further insights and evidence. The research findings were evaluated, clarified, and summarised. These findings were then discussed with corporate regulators, relevant professional institutes, and other academics in the UK, Continental Europe, and North America. These included the Department of Trade, the Council for the Securities Industry in London, the European Commission, the Securities and Exchange Commission in Washington, the American Institute of Certified Public Accountants, the Chartered Institutes of Accountants in England and Wales, in Scotland, and in Canada, and the Institute of Directors in England and in Australia. A final report was written, which was published as a book [Tricker (1984)].

Research literature survey

The lengthy literature search disclosed some explanations of the work of boards, their directors, and companies’ relations with their shareholders. Many of them were written from the perspective of company law. Others discussed financial reporting, company accounts, and board-level responsibilities. Some gave advice to directors, particularly publications of the US Conference Board, the UK’s Institute of Directors, and legal and accounting professional journals. However, relatively few serious research-based studies were found.

A seminal work, Berle and Means (1932) discussed The Influence of the Modern Corporation. Freidman (1970), in a work that was to be discussed for decades, argued that the social responsibility of business was to increase its profits, within the law. Mace (1971) discovered that contrary to the conventional wisdom that outside directors supervised the executive directors, instead they merely gave advice.

Mautz and Neumann (1970 and1977) had written about board audit committees, which were required by the SEC in the United States. In the UK, the Confederation of British Industry (1973) commented on the responsibilities of the British public company. Jensen and Meckling (1976) offered a theory of the firm, whose agency theory underpinning was to become the foundation of much subsequent corporate governance research (although the phrase ‘corporate
governance’ was not yet used). Bullock (1977) had produced a report on industrial democracy in the UK, calling for worker directors on existing UK unitary boards. But the literature research did not find a definitive body of knowledge on boards of directors, nor a name for this field of study.

Research investigations and interviews

Published reports from the largest 500 UK companies were used to identify their group structures. The results were aggregated grouping companies by market size, by the number of subsidiaries, and the levels at which these subsidiaries were held (i.e. subsidiaries of subsidiaries).

Interviews in the subject companies followed. Typically, these interviews were approved by the chair of the board of the parent company and, sometimes, the entire board. The group company secretary typically provided information on board level procedures throughout the group. The aim was to discover how the boards of each company in a group worked; information that was not available in the management literature.

The knowledge already collected about the number of subsidiaries and group structure was discussed. Surprisingly, not every company secretary knew the number of subsidiaries in their group, nor at how many levels they were held. Indeed, in one case, the company secretary denied that subsidiaries were held at so many levels, until he was shown the research data.

The responsibilities of the board of each subsidiary and the reporting requirements to the parent company board were then explored. Examples of group board-level protocols, reporting systems, and board agenda were collected, with due regard for their inevitable confidential nature.

The notes of these interviews and supportive data were analysed and position papers drafted, which were discussed at roundtable discussions with directors, their advisers, and regulators.

Research findings

Analysis of the structure of the top 500 British companies showed, inter alia, that the larger companies had an average of 230 subsidiaries (the highest being 858), which were held at up to four levels (with the longest string of subsidiaries being a surprising 11 levels).

It also appeared that group parent companies saw their subsidiary and associated companies differently. Some groups were run from the centre, relying on group-wide management information and control systems to co-ordinate and control. Corporate strategy was formulated by the group board, not subsidiary company boards. Group-wide policies were strictly enforced, and control exercised through budgetary and profit-centre financial systems. The boards of these subsidiary companies were usually the senior management of that company: non-executive directors were rare, and never independent outsiders, but senior managers from the parent company or other companies in the group.

At the other extreme, the parent company treated its subsidiaries as relatively independent entities, their boards responsible for setting strategies. Group-wide policies on, for example, labour relations, financial controls, and customer relationships, provided a group culture; but subsidiary company boards had considerable freedom to develop corporate strategies, reporting strategic developments and seeking financial approval from the group board. The boards of these subsidiaries did often have outside, non-executive directors, particularly when based overseas. Many of these groups were conglomerates, operating in various industrial and commercial sectors. Sometimes, subsidiaries were grouped in a matrix of strategic business units and regional divisions.

In a few cases, subsidiary companies were not operating businesses at all, but formed for legal reasons to protect a name or brand, to limit exposure to significant risk, or for international tax planning. In such cases, the board was a cypher, meeting only for legal formalities, with no discretion.

Outcomes from the Nuffield research

The first clear outcome of the project was confirmation that the work of the board, which the study referred to as ‘governance,’ was not management. Existing management theory did not cover the work of boards of directors. The classical ideas of Fayol (1930) and the half century of subsequent contributions to management literature referred to the work of managers, not directors.

However, the work of boards and their directors did have a certain coherence. They were all involved in the longer-term strategic direction of their enterprise, approved management’s reports, appointed and supervised top executive management and reported to their members on corporate performance; but the processes lacked a formal framework or a name.

The legal framework surrounding companies provided constraints and required compliance, but did not provide guidelines on board-level activities. The next challenge for the research was to identify such a framework.

The governance circle and management triangle model

In an attempt to show the distinction between governance and management diagrammatically, an inverted triangle (the board) was superimposed on the traditional management pyramid. Board responsibilities were then distinguished from those of management. This diagram was included in the published research report.

Subsequently, this diagram was replaced by two separate models [Tricker (2009)] to illustrate the relationship between governance and management more clearly. These are sometimes referred to, as ‘the governance circle and management triangle model,’ and ‘the ‘quadrant of corporate governance.’

In the circle and triangle model, the governance circle shows the board structure, with the type of each director on that governing body. The management triangle depicts the upper levels of management, identifying which, if any, executives are also members of the board. In the following example, the directors in the board circle are identified as:

This example depicts a board with 10 members: 3 connected non-executive directors, 6 independent non-executive directors, and one executive director. The diagram can be redrawn to illustrate every possible board configuration
– the all executive board
– the majority executive board
– the majority non-executive board
– the all non-executive board, which is in effect a two-tier board

The corporate governance quadrant

The governing body of every corporate entity has to be concerned with the future direction of that organisation (focusing on the future strategies and policies) and on its past (overseeing the performance of the executive management and demonstrating accountability to their members). Consequently, governing body members need to look inwards at the internal operations of the enterprise and outwards to its external situation. The corporate governance quadrant depicts these relationships.

The right-hand cells of the quadrant (strategy formulation and policy making) reflect the performance of the organisation and are forward looking: the left-hand cells (monitoring/supervising and providing accountability) reflect conformance with the strategies and policies, and accountability to members, and reflect on the past and present situation.

The box at the centre of the diagram, linking the board with management, was added at the suggestion of Professor Fred Hilmer, [Hilmer (1993)], Dean of the Australian Graduate School of Management, Sydney, while the author spent a sabbatical as a visiting professor.

Boards vary in the extent to which they delegate to management. At one extreme, a board might expect the CEO and top management to propose strategies, policies, and plans with budgets for board approval: at the other extreme, another board might formulate corporate strategies and determine corporate policies, presenting the CEO with their decisions for implementation. These board practices can change as the enterprise’s strategic situation shifts, or the board leadership and culture change.

The governance of the Institute of Chartered Accountants

In 1982, during the Nuffield research project, the author was asked to undertake a study of the Institute of Chartered Accountants in England and Wales (ICAEW). Members of the Institute were originally engaged primarily in audit and taxation work, but by the 1980’s many members held positions in business, as management accountants, finance directors, or chief executives, others worked in management consultancy. The Institute’s Council (the author was a member of the Council) was concerned that the Institute might no longer reflect the interests of all of its members.

The resultant report [Tricker (1983), was titled ‘Governing the Institute – a study on the governance of the ICAEW,’ and recommended the division of members according to their specialist interests. These groups, called ‘colleges’ in the report but ultimately formed as ‘boards;’ would appoint their own governing bodies and pursue the interests of their members. The boards would have representatives on the Institute Council. The report also considered alternative forms of democracy, with alternative voting systems.

The I1982 ICAEW governance study made it clear that non-profit, professional bodies need governance; not only public, listed companies, although that became the major focus in the subject for the next twenty years.

A title for the book and a name for the subject

Gower Press, London, showed an interest in publishing the research report, but needed a title. The study of boards and their activities did not suggest an obvious name.

The Trust that had been set up to fund the research had been called The Corporate Policy Group; but the book would be about far more than corporate policy: it concerned the work of boards and their directors, about the way they related to their shareholders, the management, auditors, regulators, and the way complex groups of companies were run. At the time, this process had no obvious name.

In 1934, the United States Government enacted the Securities Exchange Act (1934), which created the Securities and Exchange Commission (SEC). The founding documents described the SEC’s aim as: ‘to regulate the governance of companies listed on US stock markets…’ ‘Governance’ was not defined. Over the years, the SEC introduced numerous reporting and compliance requirements, including the establishment of board-level audit committees, but the phrase ‘corporate governance’ was not widely adopted: it certainly had not been used as a book title.

Given the widespread acceptance and use today of the phrase ‘corporate governance’ [Google offers 294 million references], it is hard to believe the phrase was seldom used before the 1980’s. Nevertheless, ‘corporate governance’ seemed to cover the processes described in the book and, more importantly, distinguished the topic from management.

A chance conversation at a Nuffield College high table dinner confirmed the use of the word ‘governance.’ A visiting professor of English language asked the author what he was working on. ‘A book,’ was the reply, hardly surprising since, probably, so was everyone else at that table. The visitor asked the title. ‘Corporate Governance.’ ‘You mean ‘corporate government?’ ‘No. Corporate governance.’ ’Interesting. Chaucer coined that word in the 14th century. But it has mainly been used to describe the government of countries, not companies.’ The visiting professor agreed that ‘corporate governance’ was the appropriate title for the book. Moreover, the author had written ‘The governance of the Institute of Chartered Accountants in 1983.’

Before the book about the Nuffield research was published, Michael Earl invited the author to contribute to his book [Earl (1983)] – Perspectives on Management – A Multi-disciplinary Analysis.’ This was an opportunity to trial the phrase ‘corporate governance’ and the author’s paper was called Perspectives on corporate governance – intellectual influences in the exercise of corporate governance. No one seemed unduly perturbed by the phrase.

So, the book on the Nuffield research became Corporate Governance – practices, procedures and powers in British companies and their boards of directors Tricker (1984). Notice that the word ‘powers’ appeared in that title: the concept will resurface in this paper.

The phrase ‘corporate governance’ was soon to become widespread, but it was the Cadbury Report (1992) ‘The Financial aspects of Corporate Governance.’ that gave the words prominence, not my book. Subsequently, Cadbury wrote that ‘Bob Tricker’s 1984 book introduced me to the words ‘corporate governance.’ Graciously, he added that ‘I have always regarded Bob Tricker as the father of corporate governance.’ But that accolade undoubtedly belongs to him: it was the Cadbury Report that led to the host of other corporate governance codes around the world and the widespread acceptance of the notion of ‘corporate governance.’ The Cadbury Report (drawing on his experiences on the board of the Cadbury chocolate company, Cadbury continued his interest in corporate governance, publishing The Company Chairman [Cadbury (1995)]), not my book, launched the phrase. I take comfort in the remark of John Maynard Keynes that future developments often come ‘from some unknown academic scribbler of a few years back.’

In 1988, the Financial Executives Research Foundation (Cochran, Philip L. and Steven L. Wartick (1988) Corporate Governance: A Review of the Literature. Financial Executives Research Foundation, Morristown) in the United States had published an annotated bibliography of corporate governance, with lengthy descriptions of each work [Cochran and Wartick (1988)]: it had just 74 pages. Small (2011) wrote a paper which mentioned corporate governance – ‘The 1970s: the committee on corporate laws joins the corporate governance debate’ – but that was written in 2011.

The first corporate governance refereed journal

In 1992, Blackwells, the Oxford publisher, suggested a new research-based, refereed academic journal, in the new field of corporate governance. The firm invited me to create and edit this journal, which was called ‘Corporate Governance – an international review’. The editorship continued for the next eight years, with the help of Gretchen Tricker (at the time, Gretchen Tricker was Senior Research Officer of the University of Hong Kong where the author
was Professor of Finance).

Most submissions to the new journal came from economists, almost all using quantitative agency theoretical research methods. Lawyers offered some papers, but exponents of company law had other outlets for their work. A few case studies were published, accepting the Harvard Business School (HBS) view that only an attempt to capture all relevant aspects of a business situation could illuminate reality.

But different perspectives on the subject soon became apparent. Economists believed that corporate governance was a branch of economics, explained by agency theory. Those in the law faculty believed it was a branch of company law. A few social scientists contributed, drawing their insights on board-level behaviour from sociology or psychology.

Finding reviewers for papers submitted was a challenge. Lacking a unified view on the underlying discipline, reviewers had to be drawn from those whose academic orientation matched that of the paper: otherwise, rejection was inevitable.

Corporate governance becomes widely recognised

Once the Cadbury Report had raised the issues and introduced the words ‘corporate governance,’ the phrase was quickly accepted and widely adopted. Many other countries produced their own voluntary corporate governance codes, which were often incorporated into stock exchange listing rules. In the UK, a flood of further corporate governance reports followed Cadbury, refining concepts, and adding further compliance requirements for listed companies.

Textbooks were written on corporate governance, and business schools introduced corporate governance programs into their MBA and executive programs. Consultants specialised in the topic and clients discovered they had governance issues! The UK Institute of Chartered Secretaries renamed itself the Governance Institute, and around the world other governance societies were formed (the London Business School, for example, opened a Center for Corporate Governance).

In the United States in 1994, the American Law Institute published a set of legal principles on corporate governance, which generated a debate on the regulation of boards and directors by the courts. In 2020, the American Law Institute launched a project to restate US company law, explaining that:

The Institute first tackled the subject of corporate governance more than 25 years ago in Principles of the Law, Corporate Governance: Analysis and Recommendations. Although it provided valuable guidance in a new and unfamiliar area of law at the time, this area has evolved quite a bit in the intervening decades. This project will examine the state of the law today and reflect it in the Restatement. American Law Institute website 2021

In 2000, the Harvard Business Review re-printed articles it had published on boards and directors, in a collection titled ‘Corporate Governance.’ But, in the United States, the regulation of listed companies had been well covered by state company law and SEC regulations for many years, so there was little interest in voluntary corporate governance codes.

However, the collapse of some major US companies, including Enron, and the collapse of Enron’s ‘big five’ auditor Arthur Anderson in 2001, led to tighter regulation through the Sarbanes Oxley Act (2002). The National Association of Corporate Directors (NACD) produced a report on Director Professionalism (Report of the NACD Blue Ribbon Commission on director professionalism (2002), the National Association of Corporate Directors. Washington, D.C), emphasising the need for independent director involvement. In 2003, the SEC approved new requirements reflecting many of the NACD recommendations.

The US Conference Board responded to the collapse of Enron and other companies with a compendium of corporate governance practices [Plath and Brancato (2003)]:

Directors need to be sensitive and responsive to the new level of scrutiny and exposure caused by the Enron bankruptcy, the WorldCom debacle, and other corporate scandals. This blueprint best practices report – the result of the work of both The Conference Board’s Director/Senior Executive Roundtable Project and its Commission on Public Trust and Private Enterprise – is intended to serve as a compendium of leading corporate governance practices boards and management should consider within the context of each company’s unique circumstances.

The global financial crisis, starting around 2008, led to more corporate governance regulation to strengthen governance controls and protect investors. In the United States, the Dodd-Frank Act (2010) – The Wall Street Reform and Consumer Protection Act (Dodd-Frank Wall Street Reform and Consumer Protection Act [Public Law 111–203] [As Amended Through P.L. 115–174, Enacted May 24, 2018]); produced further regulation of the financial sector, with greater transparency. The Securities and Exchange Commission also called for all public companies to create board-level committees to consider their companies’ exposure to risk. In the United Kingdom, the Financial Review Council proposed changes to the UK corporate governance code, emphasising the boards’ responsibility for corporate risk strategy.

The United Nations produced two reports on corporate governance (2009 and 2014); the first called; ‘The Global Compact – Corporate governance: The Foundation off Corporate Citizenship and Sustainable Business‘, the other ‘Guidance on Good Practice in Corporate Governance Disclosure.’

In 2015, The Organisation for Economic Co-operation and Development (OECD), representing 37 countries, issued a pro-forma corporate governance code [OECD (2015)] to enable countries to develop their own corporate governance code.

In 2016, the Institute of Directors in South Africa published the fourth King (https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/6844B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf) Corporate Governance Report, which emphasised the ethical and societal responsibilities of governing bodies, proposing a board social and ethics committee. King also recognised that all corporate entities need to be governed and wrote that his report was applicable to them all – private and public sectors, profit and not-for-profit organisations. Compliance still remained voluntary, although the Johannesburg Stock Exchange made compliance a listing requirement.

In 2017, the International Business Council of the World Economic Forum [Lipton (2017)], published what they called ‘a new paradigm for corporate governance.’ In fact, this was a call for a paradigm shift in the relationship between corporations listed on stock exchanges and their investors. The ‘short-termism’ of some investors, it suggested, needed to be replaced by a longer-term strategic focus. The report proposed that listed corporations should emphasise long term strategy, shareholder engagement, risk management, social responsibility, and establish what the report called ‘the tone at the top,’ meaning setting the corporate culture. Whilst the emphasis on replacing short-termism might improve some companies’ standing in society, the proposed topics are explored in every corporate governance textbook. The World Economic Forum report does not offer ‘a new paradigm for corporate governance’.

Moving on

So, what have I found in my personal odyssey so fat? I have discussed the evolution of corporate governance previously [Tricker (2020)]; suffice it here to say that, although the phrase ‘corporate governance’ is less than four decades old, the notion is as old as trade. In the middle ages, merchant venturers entrusted their voyages and their wealth to the masters of their ships. In the mid-19th century, the brilliant invention of the joint-stock limited-liability
company, raised capital from shareholders, who trusted their directors with their funds. Subsequently, such trust has been eroded by reliance on contract and law; but trust remains fundamental to the concept of the limited company.

In Part One of this paper, we saw how the arrival of the first voluntary corporate governance code quickly led to the widespread use of the phrase ‘corporate governance’ and the ready acceptance of its significance. We have seen the importance now attached to corporate governance by professional institutions around the world (in Part One we noted contributions from the American Law Institute, the conference Board, the Institute of Directors, the National Association of Corporate Directors, the OECD, the United Nations, and the World Economic Forum).

A primary focus during the 20th century in organisations was on ‘management.’ In the 21st century that has been replaced by ‘corporate governance.’ Nevertheless, we also saw that, although corporate governance seemed to have arrived, it lacks clear boundaries, faces disagreements about its scope, and meets contradictory academic theories. In other words, corporate governance lacks a unifying paradigm. Nor is there a single, widely accepted, definition. That is the topic for Part 2 of this paper, which will follow. Part 3 will consider reinventing the corporation.

Bob Tricker
May 2021

Why was the listing of China’s Ant Group dropped?

It would have been the world’s largest stock market IPO (initial public offer), raising $34 billion; but two days before Ant Financial Services Group was due to list on the Shanghai and Hong Kong Stock Exchanges, the listing was dropped. Why? Was corporate governance the reason, as the Shanghai Exchange suggested?

In the fourth edition of my Corporate Governance textbook, and my book on Corporate Governance in China, I tell the story of the Alibaba Group, one of China’s most successful companies, founded in 1999 by Jack Yun Ma, a teacher of English from Hangzhou.

In 2011, Alibaba spun off its financial arm into Ant Financial Services Group, including its vast electronic payment system, Alipay, keeping a controlling stake. In 2020, Jack Ma and his colleagues decided to float the Ant Group on the Shanghai and Hong Kong Stock Exchanges. The listing was planned for 5th November 2020; but two days before, on 3rd November, the Shanghai Exchange stopped the listing and the Hong Kong Exchange had little choice but do the same.


The Alibaba Group is China’s largest e-commerce group and processes more transactions than Amazon and eBay combined. Alibaba is a global leader in internet-based businesses, offering advertising and marketing services, electronic banking through Alipay, cloud-based computing, network services, and mobile communications. The Group also sells products, both wholesale and retail.

The Alibaba Group was listed in New York in 2014, raising US$22 billion, then the largest initial public offering, and was massively over-subscribed. Alibaba shares in New York fell dramatically when the Ant Group listing was aborted.

The governance of Alibaba

The company publishes a mission statement and emphasizes the importance of its values, with a code of ethics stating that the conduct of all employees should ‘reflect Alibaba Group’s values and promote a work environment that upholds and improves Alibaba Group’s reputation for integrity and trust’. The board has established corporate governance guidelines describing the principles and practices that it follows in carrying out its responsibilities. The board of directors had 9 members. Six executive or connected directors, 3 independent outside directors.

The shareholders in Alibaba Group Holding Ltd have few powers over the governance of the operating company. Alibaba shareholders do not own shares in the Alibaba company itself, but in a company incorporated in the Cayman Islands, tied to Alibaba by legal agreements.’ Power over Alibaba itself is exercised by an opaque and unaccountable entity called the ‘Alibaba Partnership. Shareholders’ interests are side-lined. In the words of the Economist[1]: ‘Alibaba’s legal structure is controversial’.’

The Alibaba Partnership has around 30 members, mainly top management, including a contingent from Ant Financial Services. The number of partners is not fixed and changes from time to time. All partnership decisions are made on a one-partner/one-vote basis. The ‘Partnership’ is governed by a partnership agreement

and operates under principles, policies, and procedures that have evolved over time.

The Group believes that the peer nature of the Partnership enables senior managers to collaborate and override bureaucracy and hierarchy. ‘Our partnership is a dynamic body that rejuvenates itself through admission of new partners each year, which we believe enhances our excellence, innovation and sustainability.’

Corporate governance control over the Alibaba Company, which is listed in New York as well as Shanghai, is maintained by dual-class shares, giving enhanced voting power to those shares held by dominant shareholders. Many prominent listed companies in the USA, including Silicon Valley high-tech companies, have similar dual-class shares to keep control in the hands of the founders.

Alibaba’s founder, Jack Ma, stood back from executive control in 2019 but remains a powerful presence behind the chair.

Ant Financial Services Group

Coming to the game later than the Western world, China was able to leap-frog the personal computer era, jumping to almost all electronic transactions being conducted over the cell phone network. Many cities in China now claim to be ‘smart cities,’ with super-fast communications and broadband handling most business and personal transactions electronically.

Alipay, which handles money transfer transactions electronically, became vast with the growth of Alibaba. Other financial services were added, including insurance, credit-rating, loans, and the sale of financial products. This entire financial enterprise became the Group. In 2020, Mr Ma and his colleagues decided to launch the Ant Group on the Shanghai and Hong Kong Stock Exchanges, keeping a dominant, controlling interest.

The floatation of the Ant Group

The proposed listing of the Ant Group was sponsored by Morgan Stanley, J. P. Morgan, and two Chinese financial institutions. The Hong Kong listing was detailed in a draft document, of more than 400 pages plus appendices, published by the Hong Kong Exchange, with due usual warnings to potential investors. For more information see HKSA Listing Document.

In this document, the Executive Chairman of Ant, Eric Jing, wrote a somewhat eulogistic letter, outlining his vision of the company. Although long, I have included it in full, given its significance.

 ‘Ant Group is not a financial institution, nor simply a mobile payments company. We are a technology company using the best technologies and resources to empower banks and financial institutions to serve every consumer and small business. Sixteen years ago, Ant Group was founded on the dream that in the future, financial services would not only benefit a select few, but serve all ordinary people in their daily lives, all the time.

‘Today, we are privileged to provide one billion consumers and 80 million small businesses in China with the benefits and conveniences of technology-enabled finance to facilitate their living and business activities. We are motivated by this milestone, but we believe this is only the beginning. The financial system of the past 200 years was designed for the industrial era and served only 20% of the population and organizations. As we enter the digital age, we must better serve the remaining 80%.

‘Together with our like-minded partners, our vision is that consumers and businesses will no longer have to navigate inefficiencies to find capital, but rather, capital will be matched with consumers and businesses based on data-driven predictive technologies, which will enable every consumer and small business in the world to benefit from tailored financial services. This is our company’s responsibility and also the future we invite you to join.

Small is beautiful, small is powerful together – our business is built on three major pillars: digital payments, digital finance, and digital daily life services. That is today, but we will continue to evolve with a focus on the future. Our raison d’être is the pursuit of “the good life” by our customers – hundreds of millions of consumers and small businesses.

‘We believe that if we can enable ordinary people to enjoy the same financial services as the bank CEO and help mom and pop shops to obtain growth financing as easily as big firms, then we will be a company that belongs to the future.

‘We do not believe bigger is better. We aspire for our customers – consumers and small businesses – to become better and stronger. Our pursuit is sustainable development that lasts at least 102 years. We expect that because of our determination, every individual will enjoy inclusive and sustainable financial services; every small business will have equal opportunity to compete on a level playing field; and all aspects of life in the digital world can be accessible through open collaboration with service providers.

Solving trust issues is at the core of what we do. We have a track record of solving real problems for consumers and small businesses. Sixteen years ago, Alipay pioneered online escrow payments to solve the problem of settlement risk due to a lack of trust between online buyers and sellers. Ten years ago, we created “Quick Pay” to improve online transaction success rates. Seven years ago, we launched our money market fund, Yu’ebao, to provide ordinary people access to money management tools even if they only wanted to invest 1 renminbi. Three years ago, we made popular the Alipay’s QR merchant code, so that nearly every street vendor across all corners of China could enjoy the convenience of mobile payments. Our innovations are driven by how they fulfil our mission and vision over the long-term and not by the pursuit of short-term gains.

‘To better realize our mission “to make it easy to do business anywhere”, we are dedicated to solving the trust problem for our customers. Lack of trust is the biggest cost of doing business. Through innovations ranging from trusted online escrow to credit-underwriting based on data technology, we provide unsecured loans to small business

‘Now, AntChain is exploring the application of blockchain to establish trust in transactions among multiple parties. It would be safe to say that if we solved one core issue over the past sixteen years, it would be establishing trust. We always ask ourselves, what should we leave for the world if one day our company were no longer in business? We hope that it would be a system of trust.

We are firm believers in the future of digital inclusion. ‘The world is undergoing a holistic digital transformation in every respect. This is not exclusive to technology companies. The true era of digitization is heralded only when all industries and businesses participate. Today, the modern services industry including financial services is boosting domestic demand and employment. And the growth of the services industry will rely on digital infrastructure. This is also the expectation of consumers in their pursuit of good living. We are firmly committed to advancing the digital transformation of the modern services industry, including financial services, so that every small business can reap the dividends of digitization, and every individual can access services digitally at their fingertips.

‘We believe if you want to go fast, walk alone, but if you want to go far, walk together. We will join hands with our partners and welcome the future of digitalization together. Our aim is to leverage technology to develop incremental market opportunities by serving the long tail of small businesses and consumers. We choose to focus on enlarging the pie together with our partners rather than engaging in the zero-sum game of dividing up the existing pie. We believe that as long as we continue to leverage technological innovation to address problems, we can create even bigger markets and opportunities.

‘Today, more and more people in developing countries and regions urgently need inclusive services and their small businesses need more growth opportunities. We are committed to supporting ordinary citizens and small businesses because helping them helps ourselves by bringing the beauty of inclusion into this world.

‘Technology must serve society as the biggest gift of our time. We have been persistent in doing what others refuse to do or cannot do well, because technology blesses us with this ability and opportunity. It is technology that makes inclusiveness as a sustainable model possible, and therefore technology exhibits the greatest potential to unlock social value. We will continue to invest in technology and ensure that it’s accessible to people. Whether it’s QR codes, AI, cloud computing, or blockchain, we must move these technologies from the lab to the community, so that every ordinary person can smile because we’ve made a difference to them.

‘At Ant Group, we have cared about our responsibility to society from the very beginning. We have dedicated 0.3% of our annual revenue to philanthropy and will continue to make this annual commitment. At the same time, we continue to increase our investments in green initiatives. Over the past four years, with the participation of 550 million users who support our Ant Forest carbon-reduction program, we planted over 200 million trees. We plan to plant one billion more trees over the next decade to make the Earth a greener place. We have and will continue to support advancement for women, including our programs to give girls in poverty-stricken areas a chance to go to school and broaden their choices.

‘We know that countless difficulties and challenges lay ahead, but we will continue on the path that we believe is right. We invite you to join us on this journey of conviction and hope. They say seeing is believing, but for me and my colleagues at Ant Group, just like sixteen years ago, we can see the future because we believe.’

The governance of the Ant Group

         The HKSE Listing Document (p157/8) provides a group-wide ownership family tree. Mr Ma is shown as owning 34% of the Hangzhou Yumbo Group, with three colleagues (Mr Eric Jing, Mr Simon Hu, and Ms. Fang Jiang) holding the balance equally. Hangzhou Yumbo then owns three companies:

Alibaba, which owns 32.65% of Ant,

Hangzhou Juhan/Junao, which owns 50.52% of Ant

Overseas Investors Group, which owns 16.83% of Ant.

These companies are all described as ‘onshore’ companies. They are then shown as controlling ‘offshore’ companies, including 100% of Alibaba, which together with the A, B, and C shareholders own the Ant Group. These ‘offshore’ companies are probably incorporated in an offshore tax haven.

The Hong Kong listing document for the Ant float also provides the names and details of the three executive directors, three non-executive directors, and three independent non-executive directors of Ant, together with three members of the supervisory board. The membership and chairs of an Audit Committee and a combined Nomination and Remuneration Committee are given, as follows:

Executive Directors

Mr Eric Xiandong JING,47, Hangzhou, Zhejiang

Executive Chair 2018, Executive Director 2013. Partner of the Alibaba Partnership, a limited partner of Hangzhou Junao and a shareholder of Hangzhou Yunbo. Joined Alipay 2009 and served as senior vice president and CFO, COO, President, and CEO; previously senior finance director and Vice-President Finance at Alibaba.

Mr Simon Xiaoming HU, 50, Hangzhou, Zhejiang

CEO 2019. President from 2018/19. A partner of the Alibaba Partnership, a limited partner of Hangzhou Junao and a shareholder of Hangzhou Yunbo. Joined Alipay 2005. Founder and President AliFinance 2009. Chief Risk Officer 2013 to 2014. President Alibaba Cloud 2014 to 2018.

Mr Xingjun NI, 43, Hangzhou, Zhejiang

Executive Director and Chief Technology Officer 2020. A partner of the Alibaba Partnership and an indirect limited partner of Hangzhou Junao. Joined Alipay a in 2004 and laid the foundations for the technical framework of Alipay. President of the business and technology groups of Alipay.

Non-executive Directors

Mr Joseph C. TSAI, 56, Hong Kong

Member Audit Committee. Non-executive Director 2019. A partner of the Alibaba Partnership. Tsai joined Alibaba 1999 as a founding member and served on Alibaba’s board of directors since its inception. Alibaba’s chief financial officer until 2013, has served as executive vice-chairman of Alibaba, and is a founding member of Alibaba Partnership. From 1995 to 1999, he was a private equity investor based in Asia with Investor AB, the main investment vehicle of Sweden’s Wallenberg family.

Mr Li CHENG, 45, Hangzhou, Zhejiang.

Joined company 2005, developer and chief architect Alipay, COO

 international business. Limited partner Hangzhou Junao.

Ms. Fang JIANG, 46, Hangzhou, Zhejiang,

Member Nomination and Remuneration Committee. Responsible for

 planning, international website integrity, global operations.

Non-executive Director since 2020. Partner Alibaba Partnership, Limited Partner Hangzhou Junao.

Independent Non-executive Directors

Ms. Quan HAO, 62, Beijing,

Chair Audit Committee. CPA California and PRC. Partner KPMG Huazhen. NED Best Inc., (listed NYSE), Legend Holdings (listed HKSE),

HSBC China.

Dr. Fred Zuliu HU, 57, Hong Kong

Chair Nomination and Remuneration Committee, member Audit

Committee. Founder and Chair Primavera Capital Group. Previously MD Goldman Sachs China, and IMF. Director UBS Group (listed NYSE), NED IC Bank of China (listed Shanghai), Hong Kong Stock Exchange (listed HKSE).

Dr. Yiping HUANG, 56, Beijing

Member Nomination and Remuneration Committee. Professor and Director Institute of Digital Finance Peking University. Director Citicorp Asia.

Supervisory Committee

According to the listing document, the Supervisory Committee has three supervisors – one employee representative and two non-employee representatives. The non-employee representative supervisors are elected at the shareholders’ general meetings. The employee representative supervisor is elected by the employee representatives’ general meeting.

The three supervisors are shown as:

 Mr Hang JIA,48, Supervisor since 2016. Chair of the Supervisory

Committee 2020. Previously, with China UnionPay Co., Ltd. as

representative for its American office, and the general manager of the

operations division of UnionPay International.

Mr Hong XU, 47, appointed Supervisor 2020. Joined Alibaba 2018, Alibaba Deputy Chief Financial Officer 2020. Previously, with

PricewaterhouseCoopers 1996 to 2018. Non-executive director of

Other companies listed oi Hong Kong, Shanghai, Shenzen, and

Singapore Stock Exchanges. A member of the Chinese Institute of

Certified Public Accountants.

Ms. Quan YU, Supervisor since January 2020. Joined Ant in 2016,

 and served as a senior director. Previously, Ms. Yu was a senior

director Capital One Financial Corporation, an American bank holding company, 2002 to 2016.

The market’s reaction to the Ant IPO

The proposed floatation was well received by markets around the world. Some commentators questioned whether the company should be valued as a high-tech company, in which case it had the largest customer base imaginable with almost every business in China and large swathes of the population (over 1.4 billion) needing an Alipay account: or should Ant be valued as a financial institution, recognising that Ant was a vast bank even by global standards, and was at the heart of facilitating the shift from printed currency notes to electronic transactions? Either way, the broad conclusion was that the IPO was favourable and the launch price reasonable.

Concerns were expressed about the political and regulatory risk. It was recognised that all listed companies in China had to be acceptable to the leaders of the CCP (Chinese Communist Party) as well as satisfying government and stock exchange regulators.

The possibility of competition was also raised. As a high-tech platform, competitors included the powerful TenCent Group (another vast Chinese company listed abrad). But, given Alipay’s user base, Ant seemed well entrenched. As a financial institution, the competitors were China’s traditional banks, but it would be hard to displace Ant, because of its massive financial electronic base and scale.

The listing is dropped

On 3 November 2020, two days before launch, the Shanghai Exchange stopped the Ant listing, citing ‘corporate governance failures.’ The Economist (2.1.21) suggested that Jack Ma had been told by the Financial Authorities to ‘rectify the Ant financial institutions.’ Anti-trust investigations had already begun into Alibaba.

In October 2020, Mr Ma took the opportunity, when addressing a conference in Shanghai, to rail against financial regulation that he thought was inhibiting the development of e-based transactions. His comments must have concerned the Beijing authorities; a reaction was predictable.

The last-minute decision to intervene by the authorities in Beijing suggests that when the floatation value (the world’s largest public offering) was announced, they suddenly realised the implications. The company that dominated the entire country’s electronic payments systems and e-commerce activities was in private hands and about to be floated on the stock markets: anyone, anywhere in the world, could buy shares through the Hong Kong Stock Market.

Moreover, this company would be one of the world’s largest financial institutions. Maybe the Politburo realised they were holding a tiger by the tail: time for more government control.

The concerns of China’s corporate and financial regulators

         China is a one-party state, run for the benefit of ‘the people’ by the Chinese Communist Party (CCP). During 2020, among the issues concerning the CCP authorities were the control of ‘big-tech,’ the private companies that dominated the provision of electronic communication,

e-transactions, and e-commerce; and the growth of electronic money transactions associated with the provision of credit, which challenged traditional banking systems and was not susceptible to existing banking controls.

         To appreciate the implications of such concerns about the Ant flotation, it is necessary to understand something of the Beijing regulatory apparatus.

The Politburo

The Politburo comprises the top officials of the Chinese Communist Party (CCP) and meets monthly. The policy concerns of the Politburo can often be deduced from commentaries in the People’s Daily, the main newspaper of the CCP. Both the concerns about the implications of ‘big-tech and the effect of electronic money on the banking system were apparent.

Regulators in Washington, London, and Brussels have voiced similar concerns about the unaccountable power and influence of Western internet powerhouses, such as Google and Facebook.

State Administration for Market Regulation

China’s authoritarian government initially seemed to take a laissez-faire approach to big-tech, allowing the unfettered growth of country-wide internet communication and internet platforms to thrive. Indeed, the internet companies were celebrated as icons of the nation’s

technological lead, with its ‘smart cities,’ electronic money transfer, and e-commerce.

Eventually, Alibaba and Alipay began to dominate their markets. Now, it seems, the big-tech companies have attracted the

regulator’s attention. In 2020, the State Administration for Market Regulation instituted an investigation into whether the e-commerce group Alibaba had engaged in monopolistic practices, such as requiring vendors not to sell goods on other platforms.

The week after the Ant listing failed, the market regulator issued rules to combat anti-competitive behaviour by internet companies.

China Securities Regulatory Commission (CSRC)

China Securities Regulatory Commission (CSRC) is a ministerial-level public institution, directly under the State Council, which performs a unified regulatory function on China’s securities and futures markets, and ensures the legal operation of the capital market. The CSRC oversees the operation of the China Company Law (1993 and subsequent updates) and regulates state-owned and private companies.

The Peoples’ Bank of China (PBOC)

PBOC is the central bank of China, responsible for carrying out monetary policy and regulating the banking laws of mainland China (not Hong Kong Special Administrative Region). It is an executive department of the State Council. Its asset holdings are the largest in the world.

The digital yuan, now dominated by Alipay, is a potential threat to the traditional bank notes and the banking system’s money handling regime.

Ministry of Finance of the PRC

The Ministry of Finance handles fiscal policy, economic regulations, and government expenditure. It is also the national

executive agency for macro-economic policies and the national annual budget. The Ministry publishes the country’s macroeconomic data.

            During 2020, while Ant was preparing its IPO, China’s financial regulatory authorities, including the Ministry of Finance, the Peoples’ Bank of China, and possibly the CSRC, called for a meeting with Ant to discuss its financial supervision.

Bank of China (BOC)

A large commercial bank founded in 1912, Bank of China survived the vicissitudes of China’s history, to become the dominant financial institution in the country, with a global service network. The Bank was a wholly state-owned enterprise, until floated in 2006 on the Shanghai and Hong Kong Stock Exchanges. The Bank developed China’s international trade settlement system, overseas fund transfer, and other non-trade foreign exchange services. The Bank now offers business and personal banking, loans, investment fund and securities management, insurance, aircraft leasing, and other financial services. The Bank claims to relate its strategies to leader Xi Jinping’s ‘Thoughts on Socialism with Chinese Characteristics for a New Era.’

Why was the listing of Ant Group Stopped?

         It would have been the world’s largest IPO. The withdrawal of the listing by the Shanghai Stock Exchange, two days before the planned launch, was dramatic. Something significant had obviously happened.

         The Shanghai Exchange spoke of ‘corporate governance irregularities’ and, certainly, there were some unanswered questions about the information provided in the listing documents; although the proposed listing had obviously satisfied the listing rules of the Hong Kong Stock Exchange, which embrace the Hong Kong Corporate Governance Code, itself modelled on the original UK Cadbury code.

         Corporate governance commentators had previously raised concerns about the role of the ‘partnership’ of executive directors and top management in Alibaba: similar concerns were expressed about the ‘partnership in Ant, which seemed to wield considerable, but unaccountable, power. Others were dubious about the offshore nature of the companies whose shares were to be listed and offered to investors, while power over the onshore operating companies was wielded by Mr Ma and his immediate colleagues. The Supervisors, also, all seemed to be senior executives of the company, mainly with a financial orientation: no obvious representative of the workers or a member of the CCP, with a link to the Party, which is found in many Chinese supervisory boards.

         But there must have been other, underlying issues to cause such a significant, last-minute cancellation of the listing. Three major issues can be deduced from the case:

  • Failure of Mr Ma and his colleagues to appreciate the political context and regulatory risk they faced

         In recent comments to a Shanghai conference, Mr Ma had publicly criticised the Beijing authorities for what he claimed was their failure to recognise the significance of modern electronic banking and adapt financial regulations accordingly. Such a statement would have been totally acceptable in Western democracies, even welcomed: but not in China. Confucian beliefs demanded respect for hierarchy: children respected the head of the family, who respected the head of the village or family clan, ultimately respect was expected for the Emperor and his learned advisers. Today, the Emperor and his court have been replaced by the leaders of the PCC – the President and the Politburo. Respect, not criticism, is expected. In Chinese society and particularly in business, much effort is made to build close, lasting personal relationships (guanxi): it seems Mr Ma might not have cultivated such relationships with Beijing.

  • Failure of the Beijing financial authorities to appreciate the implications of Ant’s domination of electronic systems throughout China

For years, Beijing had promoted the country-wide development of electronic transactions and money transfer as a sign of China’s technological and economic leadership. Too late, they seem to have realised the likely corollary that the organisation providing those services would become very large and powerful.

  • Failure of the Beijing authorities to appreciate the scale and dominance of Ant as a financial institution

The vast size of the Ant IPO, the largest in history, probably staggered the Beijing authorities. Too late, they may have realised that the Ant organisation had become a major banking institution.

Hundreds of millions of ordinary people now held Ant accounts, and banked electronically, outside the conventional banking system. Ant had enfranchised hundreds of millions of businesses, merchants, and shop keepers as customers, offering them deposit accounts, credit options, as well as money collection and transfer facilities.

Electronic banking, and Ant’s domination of it, was a challenge to traditional banking practices and to existing banking regulation in China. The lack of Government oversight and control of the sector had become apparent.

         In China, awareness of regulatory risk ought to be a prerequisite in all strategy formulation. Ant’s directors may have become over-confident, encouraged by the lack of Government interest to date, despite the staggering growth of their electronic and financial enterprise.

         As Gregg Li and I emphasise in our book, China’s authorities expect and encourage corporate governance practices to evolve, contributing to economic growth and social stability, rather than to see corporate governance as the way to regulate and control, as in the West.

But, in an authoritarian, one-party state, political and regulatory risk remain high and need to be understood in every board room.

On the news of the stopping of the Ant listing, Alibaba’s shares in New York fell significantly. Mr Ma, who had met with the authorities in Beijing immediately before the listing was stopped, made no statement and did not appear in public for the next ten weeks: when he did, Alibaba’s New York shares rose.

Bob Tricker

January 2021

The evolution of corporate governance

Both Professor Mallin and I briefly mention the corporate governance backstory in our textbooks. However, I have long felt that the way a subject has evolved may highlight current issues and controversies. When invited by Professor Thomas Clarke, the editor of the corporate governance ‘Elements’ monograph series, published by Cambridge University Press, I decided to explore the evolution of corporate governance more fully.

         In this Element, I look at the origins of corporate governance, recognizing that all corporate entities have always needed to be governed, that important developments took place in the 17th and 18th centuries, and the huge significance of the invention of the joint-stock limited liability company in the mid-19th century.

         The development of corporate governance, around the world, in the 20th century is explored, with the arrival of private companies, complex corporate groups, and the Securities and Exchange Commission in the United States, with executive management usurping shareholder power during the Inter-war years.

         Corporate collapses in the mid-’80s led to the Cadbury code of best practice in corporate governance and the arrival of the phrase ‘corporate governance’ itself.  Whilst the United States maintained federal and state corporate control through law and regulation, the Cadbury principle of voluntary adherence to a code quickly spread around the rest of the world.

The monograph identifies some unresolved issues in both principle and practice, and compares and contrasts theories of corporate governance. The subject is seen to be in search of its paradigm and a systems theoretical relationship between the theories is suggested. The need to rethink the concept of the limited liability company is argued, and a call is made for the development of a philosophy of corporate governance.

Bob Tricker, December 2020


The future of the independent auditor

Audit market dominated by the Big Four

A fundamental tenet of corporate governance is the need for independent, external audit of the financial records and the accounts presented by boards to their members. This applies to every corporate entity, but particularly to listed public companies. Consequently, the provision of reliable audit services is vital.

A recent report from the U.K.’s Financial Reporting Council[1] (FRC) showed that in 2019 the Big Four audit firms[2] continued to audit all of the FTSE 100 companies.  The Big Four also audited all but 10 of the FTSE 250 companies—the other 10 being audited by the two largest firms outside the Big Four[3]. Audit fee income for the Big Four firms increased by 6.9% from 2018 to 2019, compared to 1.7% from 2017 to 2018.

The FRC recently questioned the procedures of the Big Four, following the highly visible collapse of some of their major audit clients including DHS and Carillion.

Separation of audit from consultancy

The dramatic collapse of the energy company Enron (case 1.2 in the fourth edition of my textbook) resulted in its Finance Director being jailed for sophisticated financial maneuvering, and drew attention to the extent of non-audit consultancy work carried out by its auditor, Arthur Andersen. This fiasco and other problems led to the collapse of the global Andersen firm, and the reappearance of its consultancy arm as Accenture.

It also produced the Sarbanes-Oxley Act (2002), which forever enshrined the names of Senator Sarbanes and Congressman Oxley in the annals of corporate governance. This act imposed stringent and expensive regulation on the American audit profession at the Federal level.

According to the FRC report, the Big Four’s fees, for non-audit work for their UK audit clients, declined 20.8% in 2019. This probably reflects the cap imposed by the government on non-audit services for public interest entities. It may also be a response to the operational separation of audit work from consultancy and other non-audit work by accountancy forms, which the FRC has demanded by 2024.

The regulation of the UK accountancy profession

When I served on the Council of the Institute of Chartered Accountants[1] (1979 to 1983), the accountancy profession regulated itself. Committees of the Institute disciplined members and their firms for misdemeanours and breaking the rules. At the time, self-regulation of professions was considered appropriate. But, as the trade guilds of the Middle Ages had already shown, self-regulation can be self-serving.

Regulation of the accountancy profession has shifted towards oversight by independent bodies authorised by the state. The number of audit firms registered with the Recognised Supervisory Bodies (RSBs) is declining: 5,660 in 2017, 5,394 in 2018, and 5,127 at the end of 2019.

Given current global problems, the need for financial and strategic advice by organizations (both profit and not-for-profit) is likely to be dramatic. The challenge of how such consultancy services are overseen and regulated, world-wide, has yet to be met. Some will respond that the market will winnow the wheat from the chaff, others might find this flailing process too cumbersome.

Bob Tricker

November 2020

[1] The Institute of chartered accountants in England and Wales

[1] Financial Reporting Council, 16 October 2020. https://www.frc.org.uk/news

[2]  As discussed in a recent blog (30 January 2020) the big four are: Deloitte (comprising Deloitte, Touche, and Tohmatsu); EY (resulting from the 1989 merger of Ernst and Whiney and Arthur Young);KPMG (Klynveld, Peat Marwick, Goerdeler (formed from Peat Marwick International – previously Peat, Marwick); PwC (Price Waterhouse and Coopers)

[3].The five largest second-tier UK audit firms are: Baker Tilly, BDO, Grant Thornton, Mazars, PKF (a grouping of independent firms),

The modern board meeting

My recent blog (30 July 2020), ‘New approaches to corporate governance communication’, brought the suggestion that more changes had occurred in board-level meetings than just the widespread use of virtual meetings, which I had discussed.

I must admit that in the fourth edition of my corporate governance textbook, I do parody the old-fashioned board meeting of the ‘country club’-style board, with its older, mainly Anglo-Saxon men meeting in their formal boardroom, with its pictures of past chairman on the walls; a room used only for the monthly board meeting and occasionally somewhere to put the auditors. The agenda for such board meetings seldom varied, starting with ‘apologies’ and ‘matters arising’ through to ‘any other business.’ The agenda, prepared by the company secretary and approved by the chairman, was sent to all directors shortly before the meeting, supported by a pack of printed board papers­—financial and other routine reports. Few companies with country-club boards have survived in today’s business climate. The traditional pack of board papers has been replaced by an electronic version. Software for such applications have been available for some years.[1] in these board rooms, it is quite normal for directors to have their laptops or tablets in front of them on the boardroom table. But the use of electronic communicating devices during board meetings goes much further today.

Multiple sources of information

As well as accessing the set of formal board papers, directors may use their devices to explore other sites relevant to the topic under discussion, obtaining, for example, economic, financial, or market data and charts, or ‘googling’ other websites.

In addition to the tablet or laptop, directors may also have their smart phones in front of them. Some chairs insist that such devices be turned off, or switched to silent, to avoid disruption. Directors can then communicate with the outside world, during the meeting, at the same time as participating in it. Directors in virtual meetings will also have access to communication devices, while they participate in the meeting.

Moreover, should the need arise for more information, an executive director might say, ‘I’ll have my staff produce that information in the next three or four minutes,’ rather than, ‘I’ll have a report ready for the next board meeting.’

Directors need multi-tasking skills

As a result, directors today need multi-tasking skills, able to listen and contribute to ongoing discussions, whilst reading from a screen and texting for data. This multi-tasking ability may well come more readily to younger board members: older members may not have acquired those skills.

Meetings with more fluid agendas

Standing agendas, which follow the same month-by month pattern, now seem to be a thing of the past. Meetings are more fluid, responsive to emerging issues, with directors raising matters of concern as the meeting progresses. While still receiving financial, marketing, personnel, and other progress reports, the chair might ask, ‘what must we cover in this meeting?’ This enables rapid responses to emerging situations. It also runs the risk of the board spending time ‘fire-fighting,’ rather than focusing on vital longer-term strategic matters.

Performance issues outweigh conformance

In conventional board meetings, a well-known danger is domination by short-term trouble-shooting matters, arising from the supervision of management. Discussion of strategic issues are postponed or, worse, overlooked. In other words, conformance and compliance issues crowd out strategic thinking and policy making. However, with multiple sources of information and more fluid agendas, that failing can be overcome. However, that also needs skilful leadership from the chair.

New challenges and opportunities for the board chair

More fluid, responsive meetings raise new challenges for the chair. They also create more opportunities for leadership. As a meeting progresses, the chair must decide whether to allow or postpone discussion on issues as they arise. No longer sticking doggedly to the agenda, the chair must determine the best use of board time.

In the modern board meeting, the chair needs to ask:

  • Am I spending board time effectively?
  • Is the balance between performance and conformance issues appropriate?
  • Should more time or specific meetings be allocated to discuss longer-term strategic issues?
  • Do we need to review board policies?
  • Do I give every director, including the outside directors, the opportunity to raise matters for discussion before or during meetings?
  • are all board members able to multi-task in the way now needed? If not, what should be done about it?
  • In recent board meetings, what have we not addressed that we should have covered?
  • Does the board need to meet so often or so formally?

In the modern board meeting, directors have access to various devices to obtain information. Consequently, they need multi-tasking skills. Agendas have become more fluid, as issues emerge and are discussed. Strategic and policy matters need no longer be dominated by short-term issues, with the emphasis on performance not conformance and compliance. But these developments present new challenges and opportunities to the board chair.

Bob Tricker

September 2020

[1] for example see https://www.decisiontime.co.uk/board-software/, https://info.ibabs.eu/board-portal/, htps://www.boardtimeintelligence.com