Archive for February, 2010|Monthly archive page

Fingers in the Corporate Governance Dyke

Developments in corporate governance thinking and practice have typically been responses to company collapses. The original UK Cadbury report (1992) followed unacceptable excesses in the Guinness and Maxwell companies.  The US Sarbanes Oxley Act (2002) was a response to the collapse of Enron, WorldCom and others, with the resulting loss of market confidence and the implosion of Andersen their auditors.

 Predictably, the 2007 (and ongoing) global financial crisis will lead to further changes to governance rules, regulations and reporting requirements. 

 In the UK, whilst the Financial Review Council found no evidence of serious failings in the governance of British business (outside the financial sector); it has proposed some changes to the UK code to improve governance in major companies. These changes are intended to enhance accountability to shareholders, to ensure that boards are well-balanced and challenging, to improve board’s performance and the awareness of its strengths and weaknesses, to improve risk management, and to emphasise that performance-related pay should be aligned with the long-term interests of the company and its policy on risk.

 The main proposals for change to the existing UK Combined Code are:

  • to re-name the code the UK Corporate Governance Code
  • the annual re-election of chairman or the whole board
  • new principles on the leadership of the chairman, and the roles, skills and independence of non-executive directors and their level of time commitment
  • board evaluation reviews to be externally facilitated at least every three years
  • the chairman to hold regular personal performance and development reviews with each director
  • new principles on the board’s responsibility for risk management
  • performance-related pay should be aligned to the long-term interests of the company and its policy on risk
  • companies to report on their business model and overall financial strategy


 In the United States, changes to regulatory procedures for listed companies being considered include obligatory (though non-binding) shareholder votes on top executive pay and payments on appointment and retirement, annual elections for directors, the creation of board-level committees to focus on enterprise risk exposure, and the separation of the roles of chief executive from board chairman which are called for in the corporate governance codes of most countries.  Rules that allow shareholders to nominate candidates for election to the board, delayed by the Securities and Exchange Commission, are now likely to be implemented, according to the Economist (12 December 2009).

 The OECD’s Steering Group on Corporate Governance re-examined the adequacy of their principles in the light of the global economic problems.  The real need, it felt, was to improve the practice of the existing principles, although further guidance and principles will be published in due course.  In two seminal papers four broad areas were identified as needing attention – board practices, risk management, top level remuneration, and shareholder rights.  (Grant Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, OECD February 2009 and Corporate Governance and the Financial Crisis: Key Findings and Main Messages, OECD June 2009 (see

 But though potentially useful, these are all piecemeal adjustments; no more than fingers in the corporate governance dyke.  To date, corporate governance codes and rules have been based on perceived best practice, not relevant concepts, accepted theory, or rigorous research. The classical agency theory, adopted in so much corporate governance research so far, is proving to be a straight jacket to thinking on the reality of power. The time is ripe to rethink the way power is, or should be, exercised over corporate entities.

 Bob Tricker