The future of governance

In the introduction to its ‘Corporate Culture and the Role of Boards’ report, published last week, the Financial Reporting Council states that in its view ‘the UK governance model remains efficient and effective’.

Although its scope has broadened, the way the model works – a mixture of law, reporting and ‘comply or explain’ best practice policed by shareholders – is essentially the same one devised by the Cadbury Committee nearly a quarter of a century ago.

It is a statement of the blindingly obvious to say that there have been many significant changes in the environment in which companies operate since then, globalisation and digitalisation foremost among them. It seems inevitable that equally radical changes will occur in the next 25 years.

In the light of those changes, is the UK corporate governance model really still fit for purpose? And will it prove to be fit for the future?

As far as the objectives underpinning the model are concerned, I agree with the FRC. The principles set out in the original Cadbury Code in 1992 are as relevant now as they were then, and will continue to be. The FRC is also right that flexibility is and must remain a hallmark of the UK approach.

But we need to distinguish between the objectives and the means of achieving them. At the very least, questions need to be asked about whether the specific mechanisms and systems we have put in place remain effective. Questions such as:

  • Can the stewardship model work effectively if it is dependent on global investors with thousands of companies in their portfolio and, in many cases, no geographical or emotional attachment to the UK?
  • Does the ever greater amount of information available on companies’ activities – whether generated by the company or by others – really enable shareholders and other stakeholders to hold them to account? If not, what would real transparency and accountability look like?
  • Can existing risk management systems deal with intangibles such as brand and reputation that now account on average for two-thirds of a company’s value, and also with the increasingly dispersed and ‘virtual’ nature of many organisations?
  • Is it realistic to place greater expectations and responsibilities on boards in relation to the operational aspects of the company’s activities when they arguably have less direct control over those activities than they used to, due to changes in business models and working practices? If not, what is the alternative?

These are some of the questions that the ICSA: The Governance Institute is beginning to reflect on as it prepares its own report on the future of governance, to be published early in 2017. I expect that many of you will be doing the same. We would welcome your thoughts.

Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance.

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