August 4, 2017 Corporate Governance – a cautionary tale
The UK may have one of the strongest and most flexible corporate governance regimes in the world but even that cannot prevent governance going awry from time to time. And when it does, the consequences can be significant both for the reputation and long-term prospects of the company.
Two such instances have come to light in the past week, acting as a timely reminder that governance is not simply about following some arbitrary rules. The first comes from the AA which has parted company from its chairman and chief executive, Bob McKenzie. The immediate effect of the departure was to see a 15% fall in the share value and continuing market uncertainty as the company faced the task of filling two key roles.
Combining the role of chairman and chief executive is against the corporate governance code, being seen as placing too much pressure and responsibility on one person. Commenting on the AA’s situation the director-general of the Institute of Directors, Stephen Martin, commented “Regardless of the circumstances behind Mr Mackenzie’s departure, this story is an important reminder of the reason why the corporate governance code calls for separation of powers between chairman and chief executive. There would have been considerably less uncertainty this morning had the company not lost its two most senior positions with the removal of one individual”.
The second story comes courtesy of Sports Direct. Having received some negative headlines in recent years, particularly in regard to staffing matters, the company has taken a number of steps in order to improve its culture and governance. These, according to its annual report, include employee feedback, well-being and liaison measures. However concerns over governance issues remain and these reportedly have led two of the company’s largest independent investors to reappraise their stake in the organisation.
Now you could say that senior executives and investors transition through organisations on a fairly regular basis. But there is a gulf between forced changes which occur when governance or culture goes awry and movements which happen for positive reasons; for example in order to take businesses to the next level or enter new marketplaces. And what these stories show is that the corporate governance code is there for a reason, guiding companies to act in a positive way which benefits the organisation, its employees and its customers.