OVER the past couple of decades, we have seen massive changes in the way capital markets are organised and how companies operate and interact. There are new types – and wider geographical spread – of fund providers, while the use of intermediaries has increased and the types of services they offer has broadened.
At the same time, the public has taken a greater interest in what companies do beyond business. This has become more obvious in the wake of the global financial crisis, when taxpayers’ money was spent to bail out financial services institutions. The scrutiny of executive remuneration and tax, to take a couple of examples, now comes from the public and policy makers as well as from shareholders.
Major corporate failures often lead to the development of codes, rules and regulations to prevent them happening again. That was the origin of the UK Corporate Governance Code, first issued in 1992 as a response to high-profile business failures. A committee led by Sir Adrian Cadbury produced the basis of what the Code today is built on, also introducing the ‘comply or explain’ approach which requires listed companies to comply with the provisions in the Code or explain to investors why they haven’t done so. This approach has since been adopted in many countries around the world.
Since then the Code has been through a number of reviews and updates, but its focus remains on boards, their structure and their processes as well as boards’ interaction with shareholders – the companies’ prime stakeholders.
A challenge to the Code today is that the debate on corporate governance is increasingly broadening. Notwithstanding their significance, there are several other groups of people than boards and shareholders that have an impact on company culture and behaviour.
A code for all?
In a recent paper, ICAEW has proposed that there should be a set of high-level, fundamental principles that would promote a good culture of corporate governance across society as well as within individual companies. We call such a set of principles a ‘framework code’. The principles in the framework code should set out what we expect from businesses today, and be consistently replicated in all governance related codes rather than be regarded as another layer of regulation.
We have in recent years seen several initiatives to develop codes for specific groups, not just for boards. For example, the UK Stewardship Code for asset managers was first released in 2010. We have since seen codes being developed for audit firms, private equity investors, remuneration consultants and executive search firms. The growing importance of intermediaries in capital markets means that this trend of code development is likely to continue.
Typically, the development of codes comes as a result of external pressure on the back of perceived failings. And while they may be effective at steering a certain group’s behaviour they may not be very effective in ensuring different groups are all working towards the same goal of creating confidence in business.
Changing the public’s confidence and trust in companies has to be a collective effort – it cannot be done by individual companies, or industries, alone. We therefore believe the time is ripe to take a look at what we want the purpose of business to be and why this is not necessarily happening.
Having a wider debate can in itself help clarify what is expected of businesses today and help develop shared beliefs about what constitutes good governance and which institutions are best placed to guide and enforce desired behaviours. There will still be room for group specific codes, and the framework code should help promote consistency among them, encouraging a shared sense of accountability. It will also enable peer pressure to be more effective, highlighting the fact that there is shared responsibility for governance.
Codes are typically more effective than prescriptive rules in dealing with human behaviour so this approach has the potential to change business behaviour without creating new legislation. A framework code approach would also allow us to maintain key benefits of a code-based regime, such as innovation and long-term learning.
The ambition to establish a framework code will no doubt raise eyebrows, prompt questions and encounter challenges. However, our intention is to start a wide-reaching debate about the way we want to encourage businesses to behave and the systems in place to hold companies to account. And that surely should be a good start.
Jo Iwasaki is ICAEW’s head of corporate governance