Corporate Governance Reform

4 July 2012

Richard Tudway

The press is again full of handwringing over the latest management failures in the British Banking System in general, and Barclays Bank Plc in particular. What is extraordinary, however, is that there is not a mention of corporate governance. Everything appears to turn on personalities like Premier League football. This is an unhelpful distraction. We need to understand the source of this pervasive failure in the stewardship of bank and non bank public corporations alike. The failure arises from our reliance on unitary boards where there is no proper or effective independent ex ante monitoring of what those who run these mega businesses are up to.

This reveals another problem. Opinion leaders are mostly uninformed about alternative arrangements. These exist in several OECD countries. Our opinion leaders labour under the fond illusion that there is only one system of governance worthy of the name: the Anglo American system. Since Enron this system has become increasingly mired in controversy and failure as pervasive corporate abuse bears testimony. With shareholders (or more correctly institutional investors) detached from the corporations in which they are invested, relying on the existing powers of shareholders to alter in any significant way the balance of power is a forlorn hope. It won’t work. It can’t work. It has not been designed to perform that task.

Reforms have to go deeper. We need to institutionalise the independent supervisory board whose task it is to represent the interests of shareholders and other stakeholders. The board would be defined with clear legal responsibilities for supervising all aspects of the activities of the Board of Management. This will break the inevitable conflict of interest which arises when the ranks of the executive directors are simply expanded by recycled former executive directors appointed as independent directors, who are in turn appointed by the executive directors.

These arrangements are common in a number of OECD countries. The supervisory boards are appointed by the shareholders and the stakeholders to represent their interests. They have a binding duty in law to ensure that their supervision is rigorous and far reaching. Only by adopting something similar do we have a chance of challenging the deep seated failures of the Anglo American system of governance. The stream of disclosures following the collapse of Enron in 2002 proves that no amount of begging and pleading for better behaviour in boardrooms can address these fundamental failures in corporate governance.

The real challenge change and reform is, as ever, mostly political. The nettle has to be grasped, however, if corporate legitimacy is ever to be restored.