A question of trust

Should codes of corporate conduct be voluntary, or enshrined in law? Adrienne Margolis looks at the arguments

Despite three committees looking into controversies surrounding corporate failures and executive pay in recent years there is little consensus over what should be done.

The business community gave a warm welcome to the latest report – from the Hampel Committee – which recommended continuing self-regulation. But shareholder pressure groups and the TUC were among those calling for tougher measures, arguing that a softly-softly approach does not work.

A speech next week by trade and industry secretary Margaret Beckett is widely expected to set out the Government’s position on the whole question of company law.

The Hampel Committee produced its report at the end of January. It was set up in 1995 to review the progress of recommendations made by two previous committees, Cadbury and Greenbury. Cadbury was formed in 1991 to look into the financial aspects of corporate governance, in response to the high-profile failures of Polly Peck and the Maxwell empire. The Greenbury Committee was set up in 1995, to quell disquiet over the level of executive pay awards.

Both advised voluntary codes of conduct aimed at making managers more accountable to shareholders. But there was concern that because recommendations were voluntary, not all companies were implementing them.

The committee chaired by Sir Ronald Hampel, chairman of ICI, called for more time for self-regulation to work. It also approved a plan for the London Stock Exchange to draw up a ‘supercode’ combining the recommendations of Cadbury, Greenbury and Hampel. But there has been intense speculation that the Government would insist on shareholder approval of controversial spending on executive pay, or political donations, for example, if Hampel did not.

Beckett has not given a detailed response to Hampel. But she has welcomed the proposal for a supercode and has widened the agenda, announcing a Green Paper in the spring on ‘a major review of company law’. The minister will make her opinions clearer in a keynote speech at the annual conference organised by adviser Pensions and Investment Research Consultants (Pirc) next Wednesday. There are many views on how she should respond to the Hampel report.

Pirc is sceptical that self-regulation is the best way forward. ‘The problem is there will be an increasing number of disputes between shareholders and companies,’ says Alan Macdougall, Pirc joint managing director. ‘We think this needs independent arbitration.’ He adds that the problem with setting up any body specifically to look at corporate governance is that it ‘has a large web of relationships to other things.’

Pirc is asking the Government to appoint a company regulator with a brief including monitoring corporate governance. ‘We are the only advanced capitalist market not to have one,’ Macdougall says. In its evidence to Hampel, Pirc argued that a regulator could also identify and encourage best practice, gather intelligence and act as an independent arbitrator. The suggestion was not taken up.

Pirc has doubts about the supercode. ‘It looks good on paper. Codes can be a valuable framework for good practice. But they represent a naive view of relationships.’ Macdougall says that it is ‘entirely inappropriate’ for the Stock Exchange to have the responsibility for devising the code. ‘We question why a private body with a vested interest should be setting the framework.’

Along with many other organisations, Pirc welcomes a wider overhaul of company law, particularly if it takes account of other ‘stakeholders’.The proposal that boards should address relationships with employees and customers as well as shareholders was put to the Hampel committee by the Centre for Tomorrow’s Company. Its submission argued that Hampel was stressing the need for freedom from bureaucracy, but failed to acknowledge ‘the danger created by low public esteem of business and its values’.

Mark Goyder, Centre director, admits his organisation was disappointed that some of its ideas were not embraced. Hampel is a ’20th century response to a 21st century problem,’ he says.

The report argues that the pendulum towards accountability has swung too far, diverting board members’ attention from creating prosperity. ‘I wrote a letter to the Financial Times pointing out that it is not either/or – the two go together,’ Goyder says.

He concedes that Hampel’s remit was framed too narrowly. But he warns that through urging self-regulation, Hampel has paradoxically opened the way for the Government to legislate if public confidence in business remains low. ‘If the public is uneasy or mistrustful, this may force changes to enforce accountability,’ Goyder warns.

Hampel noted that one outcome of Cadbury and Greenbury was that a ‘box-ticking mentality’ had permeated boardrooms. ‘I have sympathy with the call for less bureaucracy,’ Goyder says. ‘But it is a two-way street. If they want less bureaucracy, they have to win more trust. It is about more than increasing value to shareholders. Companies have got to say more about their social values.’

This theme is also taken up by the TUC. In its submission to Hampel, it called for ‘a stakeholder model of corporate governance in which companies would be obliged to balance and consider the interests of all groups with a stake in the firm’.

The TUC argued that Cadbury and Greenbury were addressing the wrong issue by concentrating on shareholder control. ‘The most pressing accountability gap is not lack of accountability to shareholders but the lack of accountability to other stakeholders.’

The TUC also believes the Hampel report’s faith in self-regulation is misplaced. ‘Cadbury and Greenbury tried this route and it has not succeeded,’ a spokeswoman says, adding that Hampel appears to have based his view on ICI, which has adopted good practice in areas like directors’ contracts. ‘But companies like Granada are the opposite extreme,’ the spokeswoman says.

The TUC view is that ‘the best thing would be to announce a new Companies Act’. There is a consensus that the Government does intend to reform company law. But because the legislation is too complex to be overhauled quickly, the TUC doubts the changes could be made in this Parliament. A statement of intent may be as far as the process progresses.

Mark Watson, corporate governance executive for the Institute of Directors, believes Beckett will announce this overhaul of company law in her Pirc conference speech.

The IoD, along with the Confederation of British Industry (CBI), has welcomed Hampel’s move away from prescriptions for the boardroom, to broad principles.

‘Hampel was absolutely right to get away from the tick-box mentality,’ Watson says. But the IoD also welcomes the anticipated plan to change company law. The current law was devised in 1948 and big chunks of it are ‘dead wood’, according to Watson. The IoD, CBI and the Law Commission are among those calling for company law to include a statutory definition of a director. ‘There needs to be a definition of a director’s duty of care and fiduciary duty,’ Watson suggests.

The Engineering Employers Federation has not made a formal response to Hampel. ‘We do not normally get involved,’ Graham Mackenzie, director general, explains. The EEF endorses the CBI’s response: that this latest report on corporate governance ‘should spread good practice and allow companies the flexibility they need to operate’.

Mackenzie advises sounding out EEF member companies individually to assess whether Cadbury, Greenbury and now Hampel, have prompted any changes. ‘Quite a few have modified their behaviour,’ he believes.

This may be the case, but few of the engineering or manufacturing firms contacted by The Engineer were prepared to go into details. One exception was GKN, where Sir David Lees, its chairman, was on the Greenbury Committee. The company has split the functions of chairman and chief executive, but this was ‘a natural progression’, rather than in response to Cadbury or Greenbury, a spokeswoman says.

The view at GKN is that Cadbury dealt with good corporate practice and required fewer changes in companies whose standards were already high. ‘Greenbury had a bigger impact because the disclosure requirements on directors’ remuneration were new, more extensive, and required more technical information than the Companies Act,’ the company says. Although the Greenbury code does not have the force of law, Stock Exchange listing rules require information in annual reports based on its recommendations, the spokeswoman points out.

As for Hampel, she says it is too early to tell what will be expected of companies. This will only emerge when the changes are incorporated into Stock Exchange rules.