One of the ways with which the UK has handled corporate governance reform since the storm over Enron in the US is, surprisingly enough, sensitivity.
While the US has hit the dirt track running and fired off every type of scattergun idea, the UK, in both the government and private sector, has managed to provide useful reforms without damaging the existing systems as a result.
In the US, everyone is desperately trying to mitigate the effect of the left hand of the legislators not having known quite what the right hand was doing. The resultant chaos will not be resolved satisfactorily for several years. And, in the meantime, the extraterritorial nature of the legislation and the creation of a new oversight body will do nothing but create problems for companies and their auditors around the globe.
Again, the dust will not have settled around those issues for several years. Only then will things become clear again and some sort of judgement will be made on whether the explosive reactions of US legislators have created stability or uncertainty.
The UK’s approach has been different and FDs should be grateful for that.
There have been disagreements but, in essence, we have seen a process where reform has been built relatively seamlessly onto previous reforms.
To anyone who has followed the corporate governance saga over the past 20 years, there has been a feeling of logic and understandability in what has come to pass. This has been helped greatly by a lack of corporate disasters on the scale of the US. And now that things appear to be nosing ever so gently in calmer and more growth-oriented days, the UK should have escaped the prospect of too many skeletons falling noisily out of cupboards.
But there is also a downside to the sensitivity with which the whole period of reform has been handled. One of the biggest issues of all has been delicately skirted around. It is not an issue that creates instability, but will become ever more obvious as time goes on. This is the issue of board structure.
We live in an era when the business world is doing its best to harmonise. Efforts are being made to harmonise financial reporting rules around the world and to harmonise, or at least integrate, regulatory bodies around the world. Efforts are being made in the European Union to harmonise tax rules. But the structure under which companies run themselves remains sharply dissimilar.
The UK has a split-board system with roughly half executive directors and half non-executive directors; continental Europe has a two-tier system of executive directors and a powerful supervisory board, including representation from what used to be known as ‘the workers’. In the US, there are perhaps a couple of executive directors, including the all-powerful CEO, and then mostly non-executive directors.
These structures are sharply contrasting, but few discuss this. Some argue that the topic is off-limits, possibly for fear of starting off a fierce battle of entrenched cultural positions. Others say it does not matter because if they work within their own contexts they should remain.
As one old-hand in this field said to me once: “If the Germans feel it is important to have worker representatives on the boards, then so be it. The world would be a poorer place if you try to harmonise it.”
But the world is becoming smaller, and the more global business lines shorten the more people want to work from broadly the same model. Equally, a venture capitalist was telling me of a competitor’s downfall. They had bought a German company and somewhat underestimated the power of the supervisory board. They were told they might well have bought the company but the supervisory board was what ran it. After a few years, they gave the company back and never made any money out of it at all.
Whatever may be said on the surface, companies are going to move steadily toward broadly harmonised structures, and that means the pressure will start to build on different countries to allow board structures to alter and the underlying law to change. If this does not happen, then we are back to the old accusation and counter-accusation business of structures being in place to impede business rather than enhance it.
The debate should start now. It doesn’t have to have any urgency behind it, but it needs to operate from an acceptance that harmonisation is moving gently in from the horizon and that competitive advantage will accrue to whomever reacts most thoughtfully to it.
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