The UK has a long tradition of well-established corporate governance standards that are generally regarded as leading the world. However, some companies complain of corporate governance fatigue and investors sometimes bemoan a box-ticking culture.
The attraction of UK standards is that they are mostly based on principles without the draconian enforcement rules that accompany the Sarbanes-Oxley requirements in the US, for example.
UK standards have evolved over a number of years and are currently incorporated in the revised combined code that came into effect for reporting years starting in November 2003.
The combined code was established in 1998, embracing principles developed after initiatives led by high-profile business figures such as Sir Adrian Cadbury and Sir Richard Greenbury.
Revisions to the combined code were introduced by Sir Derek Higgs, who has beefed up the requirements for non-executive directors as well as defining the role of chief executive and chairman.
Companies are required to comply with the code or explain why not. Many investors are putting considerable pressure on boards to take corporate governance reforms seriously.
Recent research by Grant Thornton, the accountancy firm, found that at least two-thirds of the largest FTSE 100 companies already complied with the combined code and 56 per cent of the FTSE 250 companies met the standards. However, Higgs’ revisions are still some way off being implemented at many companies.
Mark Goyder, director of Tomorrow’s Company, the business-led think tank, says the success of corporate governance reforms in the UK were very much based on the fact that they were principles-led rather than rules-driven. This was made all the more evident by the uproar over Sarbanes-Oxley requirements in the US.
“We could just be entering a period where the potential US Sarbanes-Oxley rules are being challenged by a model that is more UK-led.”
Many UK investors are putting pressure on boards to take corporate governance reforms seriously
However, many companies have complained about the rising demands of corporate governance reviews as well as investor scrutiny. Mr Goyder says there was a danger of “compliance victim syndrome” where companies complained about the requirements of the governance reforms instead of applying the spirit of the code.
“Unless people get the idea of strong principles that guide behaviour and intelligently follow those and insist that others do, the alternative is prescriptive regulation,” he says.
However, Richard Lapthorne, chairman of Cable and Wireless, writing recently in the Financial Times warned that too many corporate governance requirements could constrain entrepreneurial decision-making. Some of the demands made on non-executive directors by Higgs were “very high and sometimes not realistic”.
Consider the audit committee, “where it is simply not realistic to expect independent directors to second-guess a group of accountants”, he wrote.
Companies also complain about the onus on public companies to comply with corporate governance provisions while private operators largely escape scrutiny. For example, business was lobbying for the requirement to produce an operating and financial review in the annual report - detailing material factors that may affect performance - to be extended to private companies.
The government backed away from that when it announced the conclusions of its OFR review recently, although ministers did address other business concerns by watering down some of their proposals.
An increasing number of academic studies are pointing to the fact that good governance can enhance a company’s stock market performance. There is certainly evidence to show that companies that are lacking in governance safeguards can underperform during a difficult period.
There will continue to be a debate about the need for good governance, but most UK companies have embraced the principles of the combined code. The next crucial step is to see how many implement the Higgs revisions and how quickly.
