March 3, 2017 Corporate Governance – 25 years on
In May 1991, recognising that investor confidence in The City was falling, the Financial Reporting Council together with the Stock Exchange and various other bodies established the Committee on the Financial Aspects of Corporate Governance, subsequently known as the Cadbury Committee. The Committee’s remit was to examine those aspects of corporate governance which related to financial reporting and accountability with a view to raising corporate governance standards and re-establishing confidence in UK business practices.
It is fair to say that the Cadbury Committee’s draft report in May 1992 was not well received in some quarters, with various directors and institutions perceiving it as an attack on their integrity. This led to some of the original proposals being toned down with the final report in December 1992 receiving a greater measure of acceptance.
Twenty-five years on, the Government is again conducting a review of the UK’s corporate governance code. The deadline for responses to its green paper passed on 17 February with over 400 submissions having been made and we will watch future developments with interest. At this stage we thought it would be interesting to look back at how corporate governance has fared over the past twenty-five years and whether the Cadbury committee’s remit has stood the test of time.
Firstly, it has to be admitted that one of the drivers behind the Cadbury committee review was a number of high-profile corporate collapses including Coloroll and Polly Peck and the current version of the code has not prevented other high profile collapses in recent times. Nevertheless, the report did succeed in its aim of restoring confidence in The City with the UK corporate governance code being seen as one of the most flexible and effective in the world.
Partly this is down to the ‘comply or explain’ approach. In a recent speech FRC Chairman Sir Win Bischoff commented that this ‘allowed the FRC to respond confidently and effectively to evolving market circumstances, which hard rules often cannot.’ However, in the same speech he also commented that in those instances where boards chose not to follow the provisions of the code, the explanations given were of poor quality. For this reason the FRC is looking to strengthen its oversight powers as well as calling for a review in legislation in order to strengthen the regulatory framework.
The Corporate Governance code isn’t simply a means for directors to correspond with investors. It drives business probity and good practice, helping organisations to meet the needs of the consumers and the wider society. That’s one reason why organisational culture has been brought to the fore in recent years, with the recognition that directors need to establish good culture throughout their company if they are to govern effectively.
Over the last twenty-five years the codes flexibility has been its strength and as it looks to the next 25 years it is hoped that that strength will continue to deliver trust and attract business to the UK. As Sir Win Bischoff commented ‘The Prime Minister wishes to create an economy that works for everyone, and corporate governance is expected to contribute to this.’