Britain’s corporate failures invite a governance revolution

November 18th, 2012

Image: WilliamBanzai7

The bigwigs of the City of London, corporate governance ‘gurus’ in asset-management firms and leading figures from FTSE-100 companies have a penchant for patting themselves on the back over the brilliance of the corporate governance framework they have erected over the past two decades.

The UK Corporate Governance Code (formerly the Combined Code of Corporate Governance) is overseen by the Financial Reporting Council — an organisation in which I find it difficult to have much confidence, given  its failure to address the audit and accounting standards failures that precipitated the UK banking crisis.

The code specifies how our publicly-listed firms ought to be governed, detailing such things as how top executives should be paid, how to ensure financial accounts are properly audited, how boards and sub-committees of boards should be structured, who can and cannot become the company’s chairman, and which directors are ‘independent’ and which aren’t. It does all of this on a “comply or explain” basis, meaning that if a board of directors dislikes a particular stricture, it can conjure up some reason why it should be allowed to ignore it.

The code grew organically from a series of government-sponsored reviews into UK corporate governance. These were led by a string of corporate luminaries including Adrian Cadbury (1992), Richard Greenbury (1995), Ronald Hampel (1998), Nigel Turnbull (1999), Derek Higgs (2002) and Robert Smith (2003). The process was initiated as a well-intended response to a string of egregious corporate scandals in the UK, including “Captain Bob” Maxwell, Polly Peck and the Bank of Credit and Commerce International (BCCI).

However, it is now self-evident to almost everyone apart from those who devised the codes, the wilfully blind “heads of governance and stewardship” at asset-management firms and governance advisers at “Big Four” accountancy firms that, far from making corporate governance any better in the UK, all this codifying is actually making it worse.

The shameful, scandalous and indeed sometimes criminal behaviour of many FTSE-100 firms in recent years, including BAE Systems, Barclays, BPEurasian Natural Resources CorporationGlaxoSmithKline, HBOSKazakhmys, HSBC, Royal Bank of Scotland and Standard Chartered, to name but a few, proves that Britain’s elaborate attempts to codify corporate governance have failed.

This is largely because the Codes have given rise to a shallow “box ticking” culture, in which directors are able to tick the relevant boxes but avoid their true responsibilities. When combined with pressure from a dysfunctional and ultra-short-termist investment community, this has ensured that long-term vision, morality and probity has been casually jettisoned by PLCs.

Maybe the time has come to accept defeat, abandon the Code and revert to a more robust use the Companies Acts — perhaps updated marginally — to ensure companies and boards of directors not only behave but also remember what they’re there for.

The former Observer management correspondent, Simon Caulkin, in an article on Britain’s crisis of governance published in the Guardian last Monday, provides further evidence of the failure of the Corporate Governance Code, whilst developing some of the themes addressed by William and Kenneth Hopper in their excellent 2007 book, The Puritan Gift: Reclaiming the American Dream Amidst Global Financial Chaos. These include the deep flaws in the cult of the ‘manager’.

Here are some excerpts from Caulkin’s piece:-

So jerry-built is the corporate economy erected on the scaffolding of the City codes that it can no longer deliver even the material progress by which it justifies its privileges: even with a return to growth, living standards for lower and middle earners may be no higher in 2020 than in 2000, according to the Resolution Foundation. The truth is that UK corporate governance has neither headed off major scandal nor nurtured effective long-term management. In fact the opposite is true.

The irony is that we know what makes companies prosper in the long term. They manage themselves as whole systems, look after their people, use targets and incentives with extreme caution, keep pay differentials narrow (we really are in this together) and treat profits as the score rather than the game. And it’s a given that in the long term companies can’t thrive unless they have society’s interests at heart along with their own.

So why do so many boards and managers, supported by politicians, systematically do the opposite – run companies as top-down dictatorships, pursue growth by merger, destroy teamwork with runaway incentives, attack employment rights and conditions, outsource customer service, treat their stakeholders as resources to be exploited, and refuse wider responsibilities to society?

…. But it’s not economics, it’s management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation cancelled out any gains from ever more ingenious financial engineering – leaving shareholders less well off in the shareholder-value-era since 1980 than in previous decades. The great crash of 2008 stripped away any remaining doubt: the economic progress of the last 30 years was a mirage. As Nassim Nicholas Taleb put it in The Black Swan, the profits were illusory, “simply borrowed against destiny with some random payment time.”

Over the last decades, misconceived ideologically based governance has recreated management as a new imperium in which shareholders and managers rule and the real world dances to finance’s tune. A worthier anniversary to celebrate is the death seven years ago this month, on 11 November, of Peter Drucker, one of the architects of pre-code management, which he insisted was a “liberal art”. Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: “Free enterprise cannot be justified as being good for business. It can be justified only as being good for society”.

Read Simon Caulkin’s piece in full: Management theory was hijacked in the 80s. We’re still suffering the fallout

Short URL: https://www.ianfraser.org/?p=8597

Posted by on Nov 18 2012. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

You must be logged in to post a comment Login