After most periods of excess, comes the crash, the anger, the blame and then reform.

The last big UK overhaul of corporate governance came in 2003 in the wake of the dotcom crash and a series of financial scandals such as Enron in the US.

The Combined Code laid out a blueprint for boards, focusing on the balance between executives and non-executives and particularly on the role and responsibilities of the latter.

It drew on corporate governance principles that had evolved over the previous decade and been outlined in the Cadbury, Greenbury and Hempel reports.

There are early signs that corporate governance in the UK is about to go through another bout of reform, triggered by the near-collapse of Britain’s banking sector over the past year.

As the crisis has deepened, the spotlight has turned from the executives who ran the banks, to the non-executives and investors who owned them and appeared to let it all happen.

Lord Myners, now City minister but previously an influential figure in the fund management world, told the Financial Times: “I do believe that when we ask about the state of the banks [we need to ask] what owners were doing and whether they should have done more – for example, asked more about risk and leverage. Institutions should have been more challenging.”

He is pushing for what he calls a “more informed and high-quality dialogue, a deeper form of engagement” between shareholders and boards which would define corporate governance less narrowly around compliance with the Combined Code.

A week ago, in response to MPs asking if there had been a breakdown in the UK’s corporate governance, leading UK investment institutions conceded shareholders had not done enough to check the management of banks.

They admitted they had failed to curb companies’ worst excesses or to call directors to account. Their preferred method of effecting change via behind-the-scenes consultation had failed.

“It is clear we haven’t been as effective as we could have been,” said Peter Montagnon, investment affairs director at the Association of British Insurers, Britain’s main investment body.

At that Treasury select committee hearing last week, Sir Peter Viggers, MP for Gosport, went further: had the current crisis shown shareholders, as owners of companies, were “pretty toothless”, he wanted to know.

Peter Chambers, chief executive of Legal & General Investment Management, replied that LGIM had met banking boards on average once a fortnight last year and had grilled banks about their capital needs early in 2008 after the Northern Rock failure.

“Did we engage enough? I think we did. The question is why we weren’t listened to and I don’t know the answer to that,” Mr Chambers said.

Too often, non-executive directors had failed to challenge executives and had then blocked investors who asked for checks and balances to be imposed on executives, Mr Chambers added. He highlighted in particular the Royal Bank of Scotland board.

His comments exposed a wider tension in relations between shareholders and boards that has been escalating as the recession has taken hold.

That tension has largely centred around the banks but has been manifest in a series of clashes between shareholders and companies.

Last year Marks and Spencer outraged its biggest shareholders with the sudden promotion of Stuart Rose, chief executive, to the post of executive chairman. In doing so, the retailer ran roughshod over one of the tenets of the Combined Code by vesting too much unchecked power in the hands of one individual. Shareholders said the move put at risk the long-term health and stability of the company.

In spite of investors’ efforts – in public and private – to squeeze a compromise out of M&S, the retailer’s board barely budged. Even threats to vote against directors up for re-election in the summer failed to work.

The episode – which Mr Chambers described as “incredibly frustrating” – revealed the flaws in shareholders’ fondness for behind-the-scenes negotiation and showed just how easily boards could ignore their biggest investors.

“The boards of big companies can run rings round us”, said one leading UK shareholder. “They divide and rule.

“The shareholder base of big companies tends to be extremely diverse. No shareholder group owns enough that directors have to listen. It means that boards can tell us ‘you all want different things. You can’t make up your minds. So we’ll go on doing what we want’.”

The failure of some banks’ capital raisings and the nationalisation or near-nationalisation of UK banks only widened the cracks in the relationship between companies and shareholders as the economy headed into recession.

That discord is now clear as rights issues for a long list of companies facing capital constraints come to the fore.

Investment bankers and companies argue rights issues – which give shareholders first refusal on new shares and protect their holdings from dilution – are cumbersome, expensive and add risk. Shareholders counter that pre-emption rights are an essential protection that ultimately cuts investors’ risks and therefore reduces the cost of capital.

Last autumn Barclays tested investors’ mettle on the issue, through a large issue of capital without pre-emption rights.

In the face of shareholder fury, the board offered limited concessions and to put all the directors up for re-election at the annual shareholder meeting in April.

Shareholders have threatened to vote against directors over the issue – using investors’ ultimate sanction. But few expect Barclays’ chairman or any other director to be voted out.

As Lord Myners says: “Voting is a rather blunt [tool]. Investors can only vote on things on the agenda. It is not a substitute for active and informed engagement.”

Now, though, as the recriminations fly over the causes of the banking crisis, investors are warning they will become more militant. They are threatening to scrutinise the performance of all directors more carefully, and say they will target the heads of the audit and remuneration committees in a bid to bring boards to account.

“We must be willing if necessary to vote them down”, says Keith Skeoch, chairman of the ABI investment committee.

Mr Skeoch is initiating a series of high-level discussions with senior non-executives to determine where the breakdown in relations has occurred and how companies are able “to turn a deaf ear” to their owners.

The role of the senior independent director as a channel between investors and companies will be closely examined.

For now, at least, shareholders insist there is no need for regulatory change or a radical overhaul of the Combined Code.

“In the UK, the [corporate governance] framework is a good one”, says Mr Montagnon. “But we need to apply it better.”

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