History of Corporate Governance in the UK

June 18, 2008

Governance is a word that barely existed 20 years ago. Now it is in common use not just in companies but also in charities, universities, local authorities and National Health Trusts. It has become a shorthand for the way an organisation is run, with particular emphasis on its accountability, integrity and risk management.

The “revolution” started in the early 1990s with the Cadbury Report on the financial aspects of corporate governance, to which was attached a code of best practice. Aimed at listed companies and looking especially at standards of corporate behaviour and ethics, the “Cadbury Code” was gradually adopted by the City and the Stock Exchange as a benchmark of good boardroom practice. In 1995, the Greenbury Report added a set of principles on the remuneration of executive directors (in response to some particular “fat cat” scandals, notably that involving British Gas chief Cedric Brown, whose 75 per cent rise incensed both unions and small shareholders), and in 1998 the Hampel Report brought the two together and produced the first Combined Code. A year later, the Turnbull Report concentrated on risk management and internal controls.

In each case, the reports were prompted either by shareholder disquiet over perceived shortcomings in corporate structures and their ability to respond to poor performance, or to government threats of legislation if the corporate sector failed to put its house in order.

In 2002 Derek Higgs, an investment banker, was given the brief to look again at corporate governance and build on the previous reports to produce a single, comprehensive code. Shortly afterwards, the full consequences of the Enron and Worldcom scandals were realised, leading to new unease. The Higgs Report came out in early 2003, but was greeted with horror by some leading companies, with claims that it placed an unrealistic burden on non-executives and marginalised the role of the chairman. The task of taking Higgs’s draft forward was passed to the Financial Reporting Council (FRC), a body established by government and comprising members from industry, commerce and the professions. The FRC consulted further and produced a revised Code that followed most of Higgs’s recommendations but softened a few of the more contentious points, and so gained general acceptance. With rather less fuss, at the same time Sir Robert Smith, chairman of the Weir Group, was leading a review of the role of audit committees and his recommendations were incorporated into the new Code. The 2003 Code was updated with minor amendments in June 2006, with the new version applying to financial years beginning on or after November 1, 2006.

Is all this attention on governance good for business, in the hard, commercial sense? Views differ. Several surveys have claimed that companies with better corporate governance are more profitable; sceptics have countered that it is only the more profitable companies that can afford the time and effort to make sure they follow best practice. There is no doubt, however, that the demand of shareholders and other stakeholders for good governance is strong and continuing. Investors, unions, government and assorted pressure groups are all increasingly likely to condemn a business that fails to follow the “rules”. The business case for good corporate governance is, therefore, not difficult to build.



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