Some bright spark once described warfare as “long periods of boredom punctuated by moments of sheer terror.”
Corporate governance reform follows a similar pattern. Most years, governance is a sleepy backwater beloved only by the true anoraks. But then a scandal breaks or a market failure looms and, suddenly, ‘something must be done.'
We are currently embarking on one of the irregular periods of upheaval. Just recall the number of initiatives currently underway:
- A review of the UK Corporate Governance Code, with the revised Code to be published later this month, and to be applied by companies with year ends after 1st January, 2019.
- Legislation to require UK quoted companies to disclose the ratio between the chief executive and the average UK employee.
- A review of the corporate governance practices of large private companies, led by James Wates, chairman of family-owned construction and development company, Wates Group.
- An independent review of the Financial Reporting Council, the accountancy, audit and corporate governance regulator, assessing its powers and impact. This one intends to publish conclusions by the end of the year.
Lurking in the background, meanwhile, is a potential competition enquiry into the dominance of the Big Four accountancy firms in terms of listed company audits.
What will be the outcome of all this urgent reviewing? (And, by the way, I'm in favour of this process of reform-by-review. A regular pulse-taking exercise to revisit established principles and practices is entirely sensible and proportionate. Anything to avoid a legislative ball-and-chain like Sarbanes-Oxley!)
Two conclusions occur to me. First, despite all the noise, the fundamentals of the UK Corporate Governance Code are sound, and I don’t believe we will see far-reaching changes to how the Code is framed and overseen.
Conclusion two is that much of the reform effort stems from an underlying lack of public trust in business. The locus of this discontent can perhaps be narrowed down to two issues – executive remuneration and the perceived failure of the audit profession to spot and prevent egregious wrongdoing or incompetence.
Neither problem is susceptible to simple solutions. Executive pay has been a running sore in the public mind for more than quarter of century. Repeated efforts at improving transparency and catalysing institutional investors have done much to make remuneration reports longer, and absolutely nothing to improve public confidence.
The evaporation of trust in the accountancy profession is a more recent phenomenon, accelerated no doubt by the collapse of Carillion. This has prompted demands to break up the Big Four, separate the provision of audit and non-audit services, and made irresistible the calls for a review of how the profession is regulated. Certainly, it would appear that the Kingman review of the FRC is much more focused on its oversight of the accountancy and audit sector than with its oversight of the Code.
The UK’s approach to corporate governance reform has historically been pragmatic, proportionate and incremental. I am hopeful this pattern will continue, the febrile times notwithstanding. We’ll see on 19th July when the new Code is published.
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