RSS feedsCultural change works at different speeds. Sometimes it can take generations to come through; at other times, it almost happens overnight. Change comes fastest when there is a consensus, if unexpressed, that success is desired and needed. This probably is the real legacy of the great corporate governance revolution that has changed the landscape of British business over the past 15 years or so. From the Cadbury report in 1992, through the Smith and Higgs reviews in 2003, changes that seemed earth-shattering at the time and that raised a considerable head of opposition are now seen as comfortable parts of the corporate landscape. The man behind that last review, Sir Derek Higgs, who passed away in April, made a contribution worth a review in itself.
Sir Derek was one of those people who did decent things in a way that commanded respect. He was a man of extraordinary abilities who, because he appeared so ordinary in his approach, managed to reach people by moving almost under their radar, and achieve far more than many realised at the time. This was why he was the right man to produce a review of the role and effectiveness of non-executive directors in the sometimes fevered post-Enron environment.
By putting forward a framework reliant on the reasonableness of people, he created something which would withstand any furious opposition or efforts to create greater confusion – this was in the early days of Sarbanes-Oxley, after all. The UK could have easily slipped down the path towards astonishing corporate bureaucracy, but the Higgs route took us to a world where processes and safeguards made sense. And it took us down a route that reinforced the idea that principles are better than rules.
Take the recent shouting match over the role of chairman and chief executive at Marks & Spencer. What is happening goes against the ideas championed by the Higgs report. But because that report also strengthened the idea of ‘comply or explain’ it has been possible for both sides to achieve what they wanted. M &S has a combined chairman and chief executive and the investment community has put its views across very clearly. The results will unravel over the next year. But the company will find the going difficult. It has backed itself into a position which, though satisfying internal politics, can only end in tears or, at best, in results which are very uncomfortable. Every slightest slip will be magnified. The investment community has the upper hand, but M&S is weakened.
Higgs’s point was that businesses need differentiation between the leadership of the board and the running of the business. Everyone knows this to be right and proper. It was the strength of the Higgs review simply to turn common sense into guiding principle.
But there was more to Higgs’s review than simply keeping those principles in place. It also created an atmosphere in which businesses could, well, get on with their business. Higgs was a man who wanted nonsense gone. He was one of those people with a knack for spotting essential truths amid much confusion. He had a way of putting his finger on the issue that teased out common sense. This was why he occasionally, in the process of producing his report, had problems with politicians. He would go for sense, while politicians, for their own peculiarly convoluted reasons, would go for nonsense. For Higgs this was ridiculous. But for the politicians, who were playing their own games, it wasn’t. Ultimately, when it finally appeared after much consultation and behind-the-scenes manoeuvring, the Higgs report was clarity personified. And corporate reporting has since followed that lead.
Sir Derek’s review made this succinct in his opening letter, presenting his report to the Chancellor of the Exchequer. The existing combined code and its principle of comply or explain, he said, “offers flexibility and intelligent discretion and allows for the valid exception to the sound rule. The brittleness and rigidity of legislation cannot dictate the behaviour, or foster the trust I believe is fundamental to the effective unitary board and to superior corporate performance.”
Higgs had a huge advantage over his opponents in the corporate world because he knew where the real drivers of change lay. “This is not about science,” he said. “It is about people.” And that is why change followed. In the introduction to his report, it says: “Corporate governance provides an architecture of accountability – the structures and processes to ensure companies are managed in the interests of their owners.” And then he immediately follows that with: “But architecture in itself does not deliver good outcomes. The review, therefore, also focuses on the conditions and behaviours necessary for non-executive director to be fully effective.”
This is why Higgs’s work has had such a lasting effect. He dealt with human beings, not theories. As he said in answer to a question at the press conference that launched the review: “We are dealing with grown-up intelligent people who know what bad practice is.” And, by and large, good practice has driven out bad many times since.
