A history of corporate governance
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
Governance is a word that barely existed 20 years ago. Now it is
in common use not just in companies but also in charities,
universities, local authorities and National Health Trusts. It has
become a shorthand for the way an organisation is run, with
particular emphasis on its accountability, integrity and risk
management.
The “revolution” started in the early 1990s with the Cadbury
Report on the financial aspects of corporate governance, to which
was attached a code of best practice. Aimed at listed companies and
looking especially at standards of corporate behaviour and ethics,
the “Cadbury Code” was gradually adopted by the City and the Stock
Exchange as a benchmark of good boardroom practice. In 1995, the
Greenbury Report added a set of principles on the remuneration of
executive directors (in response to some particular “fat cat”
scandals, notably that involving British Gas chief Cedric Brown,
whose 75 per cent rise incensed both unions and small
shareholders), and in 1998 the Hampel Report brought the two
together and produced the first Combined Code. A year later, the
Turnbull Report concentrated on risk management and internal
controls.
In each case, the reports were prompted either by shareholder
disquiet over perceived shortcomings in corporate structures and
their ability to respond to poor performance, or to government
threats of legislation if the corporate sector failed to put its
house in order.
In 2002 Derek Higgs, an investment banker, was given the brief
to look again at corporate governance and build on the previous
reports to produce a single, comprehensive code. Shortly
afterwards, the full consequences of the Enron and Worldcom
scandals were realised, leading to new unease. The Higgs Report
came out in early 2003, but was greeted with horror by some leading
companies, with claims that it placed an unrealistic burden on
non-executives and marginalised the role of the chairman. The task
of taking Higgs’s draft forward was passed to the Financial
Reporting Council (FRC), a body established by government and
comprising members from industry, commerce and the professions. The
FRC consulted further and produced a revised Code that followed
most of Higgs’s recommendations but softened a few of the more
contentious points, and so gained general acceptance. With rather
less fuss, at the same time Sir Robert Smith, chairman of the Weir
Group, was leading a review of the role of audit committees and his
recommendations were incorporated into the new Code. The 2003 Code
was updated with minor amendments in June 2006, with the new
version applying to financial years beginning on or after November
1, 2006.
Is all this attention on governance good for business, in the
hard, commercial sense? Views differ. Several surveys have claimed
that companies with better corporate governance are more
profitable; sceptics have countered that it is only the more
profitable companies that can afford the time and effort to make
sure they follow best practice. There is no doubt, however, that
the demand of shareholders and other stakeholders for good
governance is strong and continuing. Investors, unions, government
and assorted pressure groups are all increasingly likely to condemn
a business that fails to follow the “rules”. The business case for
good corporate governance is, therefore, not difficult to
build.
