RSS feedsOne of the joys of journalism is to take the contrarian view. If the whole media world is banging on about how the youth of today is going to hell in a handcart via alcopops and worse, then it always raises the spirits, if that is the right phrase, to point out some happy part of society where all is going well despite the nanny state’s warnings.
And so it goes with corporate governance. The veteran financial journalist Anthony Hilton, whose daily column in the London Evening Standard has always revelled in appearing on panels as the person who thinks corporate governance is a dangerous distraction. His performances on such occasions are legendary and much enjoyed. I have always tended to take the opposite view, but we argue about it and then shake hands.
But it looks as though he has, through the recent research published by the Association of British Insurers, reached a conversion about corporate governance. The research was entitled Governance and Performance in Corporate Britain and Hilton devoted part of his daily column to it on publication. This is how he started: “There are some of us who have always thought the main purpose of the drive to improve corporate governance was not to improve company performance, but to help fund managers avoid the embarrassment of investing in companies that went bust. Policy was skewed towards risk control rather than growth. Equities were required to behave like bonds, but still deliver excess returns.”
And it has to be said that the Hilton view had many adherents. It was a question of how well the way a business was run connected with how it was structured. Running a successful business requires risk-taking, bravery, good luck, a better understanding of your markets than your competitors and more. If you take a dim view of corporate governance, all you can see is a growing bureaucracy which not only inhibits nearly all of those things, but also turns into a sort of out-of-control creeper, a deadly nightshade slowly strangling the life out of an enterprise and its ability to grab business opportunities.
This sort of argument chimes with many mainstream worries in society as a whole – the erosion of personal responsibility, the futile objective of eliminating risk, the transfer of blame. It is no wonder that the concept of corporate governance has been taken seriously for so long.
There is also another reason. Although people intuitively felt an effective corporate governance structure must strengthen a company, there were few indications in the research undertaken that showed, unequivocally, that this was the case. Many surveys hinted it probably was. But there was always a whiff of wishful thinking attached to the results.
But the ABI study has probably changed all that. At the outset, it admits the same problems of doubt. “The ABI’s leading role in corporate governance stems from our members’ belief that well-governed companies will produce better returns for shareholders over time,” it says. “Long-term value creation matters to insurers because their holdings are long-term in line with their liabilities. Yet, while this has prompted us to undertake serious dialogue with companies and considered voting, the causal relationship between governance and value creation has never been demonstrated.”
This time, that has changed. And it has probably changed because the principles of good corporate governance have evolved – or morphed beyond recognition with so much input and interpretation. It is no longer a recent innovation. It has become the established default culture. The ABI study showed something new. “One important conclusion, not highlighted in other research, is that good governance reduces volatility of returns”, it says. “Moreover, good governance is also a precursor to good performance rather than vice versa.”
What has happened is that the ABI now has web-based data stretching back for a good period, and it has spotted a direct link – proving their original manifes to. Companies that received what the ABI terms a ‘red-top alert’ from them warning about a serious governance transgression are less profitable and generate less value over time for shareholders than other companies. And over the years that followed, they produced a lower return on assets and a poorer share price performance.
But there is also contrary evidence, muddying the waters. The corporate governance movement has not made life easier for the board of directors. Rather, the opposite. Boards that failed to live up to the required standards of corporate governance found that, far from producing a more successful company, they were scrambling about dealing with all sorts of other problems. As the ABI points out: “The volatility of share returns is 9% lower for well-governed companies than poorly governed companies.” And as Anthony Hilton put it: “Taken as a whole, the conclusion seems inescapable. Despite scepticism from people like me, good governance makes a difference.”
Who’d run a FTSE company?
