It is remarkable to think that the catalyst for modern
corporate governance was, a mere 14 years ago, just a committee charged with
coming up with some ideas. This was the Cadbury committee. And, although its
appointment smacked of political expediency, it came at exactly the right time.
It was set up in the aftermath of a great string of corporate scandals, most
of them the effect of rogues, like Robert Maxwell, believing and acting as
though they alone were the company, the shareholders and the only person who
mattered in the business. It was an ugly time. English culture is not good at
knowing how to stand in the way of a bully and bring their activities to a halt.
Needless to say, the auditors were deemed to be the fall guys. They had, most
obviously, failed the system. So had the banks, the lawyers and the City
generally, but it was the accountants on whom the onus should fall. So the
accountancy bodies, to head off this criticism, looked for what one of them
described as a “magic bullet”. And they found it in the appointment of the
The rest is history. And if you want to marvel at the effect that the
resulting corporate governance revolution has had, not just in the UK but around
the globe, then you need to read the measured and thoughtful words of Jonathan
Charkham. He has just published the most comprehensive survey and history of
what has happened during the post-Cadbury years.
Charkham underlines just how fortuitous the timing of Cadbury was. It hit
corporate thinking at just the right time. Liberalisation of capital flows and
cross-border investment was just taking off. The shift from command-style to
market economies was finally tilting decisively towards markets. The whole trend
towards globalisation in both thought and deed was accelerating. The creation of
a practical corporate governance code, which could be adapted easily to these
great shifts in corporate behaviour and corporate structures looks, with
hindsight, to have been truly inspired rather than the pragmatic and parochial
response that many characterised it to be at the outset.
The whole corporate world has changed totally in the post-Cadbury years.
There have been upheavals, advances, failures and successes. Companies, with
good reason, can complain that they are beset with more regulation and
regulators than ever before. And Charkham suggests that “a pause for reflection
while existing reforms work through” would be important. But the real change is
not the myriad measures, from Sarbanes-Oxley to Combined Codes, but the overall
transformation in the nature of corporate thought.
By that I do not mean the cliché of directors taking their eyes off the ball
of enterprise and instead focusing on box-ticking. The transformation is in the
idea that, in the long-term, the behaviour of a company is the most important
part of both its reputation and its ability to maintain and grow its business.
That is now at the heart of the thinking of the board of any serious company.
And it is not there as a paste-on mission statement. It is no longer debated. It
is just there. That is the real corporate governance revolution.
But the real Cadbury legacy may be in the change that it is bringing about in
the US. In the 1930s, the road towards corporate disclosures and financial
reporting hit a fork. The UK went one way, the US another. As Charkham puts it
“US accounts are primarily there to serve the stock market. UK accounts were
designed to serve everyone.” As a result, the publicly visible corporate America
is limited to the largest of the large and the people in charge tend to be
larger-than-life characters who can move the markets. Corporate UK covers a vast
number of companies and they produce much more information. Companies are,
therefore, much more disparate and regulation is a big issue. So a code, like
that of Cadbury, had to develop the idea of “comply or explain”.
It is the spread of that dictum to the US which may be the lasting legacy of
the corporate governance revolution. Certainly, in the early 1990s, if you had
suggested to a serious US corporate player that there were dangers in the CEO
and the chairman being the same person you would have been greeted with
incredulity followed by a lecture on how the top man should be as powerful as
Shareholder value was then the US mantra. This, Charkham points out, “led to
tyranny of quarterly earnings, in which juicy options, plus a desire at least to
match analysts’ expectations led to figures often being massaged in ever more
sophisticated ways”. Officialdom stood by. The processes of governance atrophied
as boards met for too short a time and the individual members had no
opportunity, leadership, or inclination, to become more deeply involved.
External auditors served the management who often awarded them lucrative
consultancy contracts, instead of serving the shareholders.
Much of this is still in place. But much has changed and is changing. Even
people wedded to “due process” have to make it work occasionally.