Governance rules OK: A look back over the last 25 years

In the 17 years since the Cadbury report set out recommendations on the arrangement of company boards and accounting systems designed to mitigate corporate governance risk and failure, giving birth to the current Combined Code, we have had five other major works in that vein: the Rutteman guidance in 1994, Cadbury II in 1995, the Hampel report on director remuneration in 1998 – the same year the Combined Code came into force – followed by the Turnbull report on internal control a year later. Then came the Higgs report on the role and effectiveness of non-execs in 2003, which saw a revision to the Code that year. Turnbull was revised in 2006, bumping up the need for more narrative to accompany the numbers in company financial reports. We still refer to UK corporate governance as principles-based, but with this hefty lot, it’s debatable.

That said, each of these reports had a pivotal effect on British business today. Cadbury required listed companies to ensure most of their non-executive directors are independent and on fixed terms, and that companies should have both an audit and a remuneration committee. Ruttemen required listed companies to disclose in their financial statements their systems of financial control, while Hampel enshrined the UK belief in principles of governance rather than rules for the explicit aim of avoiding a box-ticking culture and reducing red tape, which shaped the Code as it is today. The 2003 revisions to the Code required companies to separate the role of chairman and chief executive.

“All of them, to a greater or lesser extent, have brought a steady tightening of the rules and a gradual change to UK corporate culture,” Bruce said of Cadbury, Rutteman and Hampel in 2002. “At the time, the investment world – to say nothing of pensioners and employees – had suffered from a surfeit of larger-than-life characters. Looking back at the mighty achievements of the Cadbury Committee, it is now clear that the most essential and influential refo rm it instituted was the separation of the roles of chairman and chief executive.” Note the word ‘rules’.

Governance fatigue
By 2005, with Sarbanes-Oxley well in train on top of the UK-centric guidance downpour and International Financial Reporting Standards about to break, corporate governance fatigue was beginning to show. The Cadbury revisions that year had the stock exchange and the Confederation of British Industry up in arms, while even FSA chairman Lord Turner – then plain old Adair in his role as CBI director general – bemoaned the cloud of ‘corporate governance fatigue’ that settled over British business, asking if there wasn’t a way to slim-line the burden on companies. (Ironic, perhaps, that Turner finds himself adding to the library this year.) Risk management systems, as Bruce had feared, have become embedded in the machinery of business to the point where no real critique or instinct had a chance.

In summer 2004, Bryan Elliston, group head of audit and financial control at materials technology company Cookson, UK-listed but with shares registered with the Securities & Exchange Commission, told Financial Director that finance personnel had so many compliance pressures, added to recently by the introduction of IFRS, that they were suffering “initiative fatigue” – “pulled in so many directions that perhaps some things can be missed.” He added that having a regularly checked, documented approach could counter the risk of that fatigue, which put finance professionals at risk of not crossing all the T’s and dotting all the I’s – either by virtue of missing them or by opting out.

Warnings of this sort of effect came as far back as 1995 when, in our April issue, we published a survey of FDs, in association with Leeds Business School, on their thoughts around Cadbury II. Almost half said they intended not to comply with the code on the formal selection process of non-execs, for example, compared with only a few percent more who said they complied in full.

All told, there is as much confusion, willful non-compliance and fraud today as there was before any of these bibles of conduct hit. Corporate fraud has ballooned in the last year and will keep increasing, according to KPMG’s fraud barometer. Meanwhile, the accounts and reports companies publish have grown in tandem: the average annual report from a FTSE-100 company in 2007 was 140 pages – up 7% on 2006: Royal Mail told HSBC that it would restrict the number of its annual reports postal workers could deliver at one time, given how heavy it had become. And the bulge was formed of corporate governance bumph. As Deloitte partner Isobel Sharp told Accountancy Age, “It’s actually a case of, the more you explain it, the more I don’t understand it.”

For more, see 25th anniversary – featured interviews