Rewriting the governance code again
Another crisis, another corporate governance code. What started as Cadbury and developed into the Combined Code is being rewritten again. But if it changes so often, why should we think this will be the definitive version?
There is no name to attach to the rewrite this time. Sir Adrian Cadbury’s 1993 book of good boardroom behaviour was added to by Sir Ronald Hampel’s report and Sir Derek Higgs’ review to produce today’s code, but more than 100 companies, trade bodies and think-tanks have responded to the Financial Reporting Council’s consultation on proposed further changes. (And if you want a name, Sir David Walker’s report on bank board practices, including pay, will feed into the FRC review.)
There is a general split in the responses between companies trying to resist change and investors demanding more governance controls, but the key battlegrounds look like being the use of non-executive directors and the “comply of explain” principle. There is worrying little comment on directors’ pay.
“Comply of explain” supposedly gives companies flexibility to deviate from the code – say on making the chief executive chairman or sacking non-executive directors after nine years - so long as they say why. In practice investors say the get-out clause is used by companies to avoid compliance without giving good reasons and the companies say it is used as a threat – comply or else – by shareholders unwilling to accept explanations.
Perhaps that conflict means it is working well. Certainly is would be a backward step to make compliance mandatory. Flexibility has to be key to a UK governance code if it is not to repeat the strictures of Sarbanes-Oxley, the US law passed in response to Enron.
Britain’s own Enron response was Higgs, filling boardrooms with non-executives. There is clearly an appetite in some boardrooms to extend that trend, possibly becoming like major continental companies where the CEO is the only executive director. There are calls for more powers for non-execs, better non-execs and even a special code for them.
Companies should be allowed to organise their board as they wish but a room full of non-execs sounds like a lot of people asking questions with no-one to answer them. Or worse, few asking questions because they know there are no answers.
The FRC should be wary at changing a code that works fairly well most of the time when a new code is unlikely to remedy the worst corporate faults.
Cadbury was appointed to counter the excessive influence of Robert Maxwell in his companies. The new review is effectively wondering whether Sir Fred Goodwin had too much influence at Royal Bank of Scotland.
Interestingly, the bank now suggests the FRC introduces rules to define the balance between non-execs supporting the chief executive and challenging him. The words “stable door” and “bolted” come to mind, but a new code to solve the last problem is too narrow and will only require a further rewrite after the next crisis.
