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US must learn from Cadbury

One of the great cliches of the modern world is that whatever happens in America today will happen here tomorrow. As soon as someone sues someone for some extremely unlikely occurrence in the US the cry goes up that the same barking nonsense will occur in the courts over here very shortly.

And sometimes it does.

But in the case of corporate governance the exact opposite appears to be happening. The key date here is December 1992, which was when the Cadbury Report was published. Ten years on, the US seems to be starting to make tentative moves towards catching up. However, this being US business, the progress is slow and the main issue is being carefully ignored.

Looking back at the mighty achievements of the Cadbury Committee it is now clear that the most essential and influential reform it instituted was the separation of the roles of chairman and chief executive. At the time, the investment world – to say nothing of pensioners and employees – had suffered from a surfeit of larger-than-life characters. The financial pages called them “charismatic” as a euphemism for steering close to the line which separates the legal from the illegal. This was a world dominated by the likes of Robert Maxwell, and the Cadbury Report went a long way to ensuring people of his ilk would have less influence.

What has been remarkable this year is the number of US corporate disasters that have stemmed from the influence of corporate bullies. From Enron down, the stories are of bullies rather than strategists. And it is a system that still venerates the idea of larger-than-life behaviour at the helm, which has been responsible.

Partly this is cultural. The business world is much more visible in the US, so there is a stage on which CEOs can strut. Business news is extensive on television, for example, and business chiefs become personalities in the wider media. The US public sees the connection between the health of business and the health of their investments and pensions much more clearly than does the public in the UK. Here business is something which is mostly reviled or ignored by the public. The idea that the stock market largely exists to provide a means of investing the pensions of people is lost on most of them.

It is now clearer than ever that the central problem with corporate governance in the US is that the role of the chief executive and chairman is invariably the fiefdom of one feisty individual. One commentator has referred to them as “zany entrepreneurs”, which just about sums quite of few of them up.

But if the old cliche of fashion spreading eastwards across the Atlantic held true, then we would be expecting to find our own corporate disasters following in the wake of Enron and all the other US scandals. But, so far, UK corporates seem clean. I accept that in the gap between these words being written and the magazine reaching readers there may be a sudden outbreak of stunning corporate collapses in the UK, but, touch wood, that scenario seems unlikely.

It isn’t possible to measure such things, but I would not be at all surprised if the real reason for this startling difference between the two business cultures was the decade we have had during which reforms of corporate governance have bedded in. Cadbury set the parameters and was followed by Rutteman, Greenbury, Hampel, and Turnbull. All of them, to a greater or lesser extent, have brought a steady tightening of the rules and a gradual change to UK corporate culture.

The Combined Code produced in 1998 instituted the obligation that audit committees should keep an eye on additional services provided by auditors, for example. In the US, it was only last year that such figures were first disclosed in the annual report and accounts, a decade later than in the UK. It has taken the Sarbanes-Oxley Act, produced in the post-WorldCom panic, to produce any sort of comparable rule in the US.

The corporate culture in the UK has become very different to that of the US. Of course, disasters are possible, because it isn’t possible to expunge greed and deceit from human nature. But the structure of the financial reporting and corporate governance regimes in this country now have stern deterrence built into them at all levels. The result in this country has been a steady exodus of the larger than life characters from whom the US scene has so badly and unworthily suffered.

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