Jonathan makes a speech to the Corporate Governance Conference
18th March 2013
Politics and politicians necessarily play a key role in Corporate governance and over the last ten years I have seen a significant and growing appreciation of this amongst MPs and also a better understanding by politicians of the subtleties of governance issues. Statute, orders and regulation are the mainstay of what we do as national legislators – but these can often become blunt instruments in the context of corporate governance – where varying requirements between different sizes of companies, different sectors, different continents, different societal values and different regulatory environments can all lead to an adaptable reporting regime being preferable if not essential.
Ten years ago – Parliament and business and regulators were discussing the overall corporate governance environment that we should move too. The conclusions were encapsulated in statute in the 2006 Companies Act and by the city in the new Combined Code. Both of these were evolutionary rather than revolutionary – building on previous reports and Companies Acts. But importantly, embedding the concept of comply or explain – which was quite significantly debated in Parliament at the time – but which now is accepted by most politicians, as well as all of the city and business communities.
To have the right corporate governance environment is vital for our national economic and business interests. London is a great financial centre which provides tax revenue and jobs as well as drawing in talent to the UK from all over the world. Not only are we still a major manufacturer but we are also one of the main places where foreign companies will look to list and where national and international finance will look to invest. Having companies that are run in a transparent and accountable way for the benefit of shareholders; but taking on board the company’s position in wider society – is the objective to be achieved and maintained. Creating a fair governance playing field and stable regulatory environment is core to this.
Politicians have a difficult but important role in this. We must respond to public sentiment – say in relation to bankers bonuses, but at the same time we likewise have a duty to seek all sides of the debate and look at the longer term picture. That is longer than just what the tabloid papers may be complaining about at any one time. It is however doubtless the case that corporate governance in heavily influenced by fashion, often arising out of scandal.
To give this context, I quote from the start of a lecture I gave on this issue in 2003:
Nowadays, 30 years later, the debates continue but it is bankers bonuses connected with perceived failures of the banking system and public distaste for rewards for failure, that now grab the headlines. But, back in 2003 the main motivators for a review of corporate governance were the Enron scandal and the fear of company fraud, as well as executive remuneration. Generally when times are good and money is being made, people overlook things that would otherwise be picked up. I think it was Warren Buffet who said that: It’s only when the tide goes out that you see who was swimming without any clothes on. Of course we also need to appreciate the limits of corporate governance, particularly in the context of someone setting out with criminal intent, where it may not in any event help whatever systems one puts in place.
So there will be times, particularly in the criminal context, when comply and explain is not going to be appropriate and the politicians decide on the need to legislate. A good recent example of this was in relation to bribery; where there was cross party consensus that the existing Victorian legislation was not fit for purpose and that voluntary codes were not adequate. Parliament wanted to make a statement that what had been acceptable behaviour in the past, not only in the UK but for British businesses abroad, was no longer so and to back this up with criminal sanctions.
Of course it is not just a case of either regulation or voluntary reporting. Often it is a case of a mix of both. So at the time of the Companies Act there was significant parliamentary debate on the merits of the unitary board compared to the German two tier supervisory board concept. But even after that issue had been settled in the Companies Act in favour of unitary boards – further questions arose around the framework statutory position. For instance; to what extent would powerful independent NED Committees of the Board undermine the full board. Likewise the traditional British board with five or six executive directors was said by some to have been undermined by the new Combined Code requirement for a majority of INED’s; which, it was claimed, made the boards too large and ungainly. This has resulted in companies moving to the US approach of having only two or three executives on the Board. Does this leave, it was then asked, enough executives to be asked the right questions? The lesson being that what is seen as best practice in corporate governance can change. I note that, for the moment the debate on board constitution seems to be focusing on female participation.
But I hope that you can see from this example the limits of political interference and statute in corporate governance beyond setting the right framework.
In reality, UK politicians can only do so much for a number of reasons – not least given the increasingly international nature of corporate activity and I note here the recent spate of natural resource companies listing in London. The culture within these companies towards pay, terms of employment, employment of women managers, let alone having women on their boards and transparency to minority shareholders – is quite different to what we have in the west. The balance between having a governance framework that encourages these companies to list in London; yet also enforces transparency and acceptable levels of governance is a complicated issue – that I personally believe needs more work.
Also, increasingly, I think we shall see significant changes being actioned on a multi-lateral basis not least because countries wish to discourage companies moving their head offices and listings, to escape regulation. This in itself has dangers as well as advantages – looking for instance at the EU decision on bankers bonuses remuneration; which many of us in the UK have grave concerns about.
Finally, I note that whoever companies do work for – primarily their shareholders; it is not politicians. So we should expect shareholders to take a strong interest in the governance of their companies – to participate in votes and speak up when required, for instance when the board has taken a “box ticking” approach to their reporting duties. The position here is much better than a decade ago – but I do think that we have more progress to be made.