Restoring faith in governance is no easy task

S we contemplate the wreckage of BHS and the MPs’ scathing verdict on Sir P h i l i p G r e e n ’s time in charge, it is worth noting that probably no other country has invested more than the UK in corporate governance over the past 25 years.

From the original Cadbury Report to the present day, principles have been developed until the over-arching canon of work covers almost every aspect of board conduct, composition and control. Its practitioners argue that this notable achievement, if not yet widely copied by other countries, has certainly been watched with interest. But it remains a fact that in most of the world’s jurisdictions, big business is subject to much less close scrutiny, and boards are held to much less account than in this country.

But what has been achieved? Even more telling than the BHS saga is the fact that Prime Minister Theresa May’s first address to the nation before entering Downing Street was an attack on the existing standards of business governance and conduct. Is this really what success looks like? What May said would be damning coming from any politician but is astonishing from the mouth of a Conservative Prime Minister. If Labour leader Jeremy Corbyn had laid claim to this territory, it would

Anthony Hilton

have been underst andable. When someone so far to the right of him as May makes it her battleground, something seismic has happened.

She said: “The people who run big business are supposed to be accountable to outsiders, to non-executive directors who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders. In practice, they are drawn from the same narrow social and professional circles as the executive team and — as we have seen time and time again — the scrutiny they provide is just not good enough.”

Given the nature of this attack, and a second salvo recommending putting workers on boards and targeting excessive executive pay, it is ironic to note that one of the core objectives of Sir Adrian Cadbury when he penned his report a quarter of a century ago was to rebuild trust in business. At the time, it had been rocked by scandals in the empires of Robert Maxwell’s Mirror and Asil Nadir’s Polly Peck. Today, what is really harmful and concerning is that the damage is not done by some rogue outliers — it is the whole thing the public is fed up with.

This is a huge indictment. Despite all the brainpower invested in corporate governance down the years by Cadbury and f o l l ow- o n re p o r t s f ro m Greenbury, Hampel, Higgs and a dozen other corporate leaders, despite the millions spent, the thousands employed and the forests felled to produce consultations and recommendations, British business today is obvi- ously in trouble. Trust, the central aim of Cadbury’s initial report, has probably never been lower.

One problem is inevitably that the more things are written down, the less boards step back and look at what it is they are actually doing. Instead of thinking hard about their company’s behaviour and how it actually makes its money, as opposed to how they like to pretend it does, they succumb to process, with risks monitored with a zeal never seen before and reports running to hundreds of pages covering almost every aspect of business life. It is a wonderful soothing balm, allowing a box called conscience to be ticked.

These are almost all decent people who want to do the job well. But where it has probably gone wrong is that governance as it has developed has been all about shareholders. It started with institutions wanting equities to be more like bonds — they wanted the returns without the embarrassing risks. So they thought if they could turn nonexecutives into policemen, there would be no nasty surprises. They said they were trying to make the world safe for honest investors. In fact, they were trying to avoid being shown up by mistakes that undermined their claim to know what they were doing.

What they forgot is that companies’ prosperity depends on everybody — the providers of capital, of course, but also employees, s uppli er s , c ust omers, politicians and the people at large. Shareholders may be happy with what has been delivered by corporate governance but nobody else is.

May was f o l l owi ng h e r pol i t i c a l instincts and interpreting the signals from the Brexit vote. People opted for Leave for many reasons but a big enough slice did so because they felt the system was no longer working for them. Their vote was an expression of disgust at the way business and financial elites behave. They saw business leaders line up to support continuing membership of the EU, s o vot i ng directly against this became the obvious way to kick them where it hurts. Their rage had been building for years — arguably since the 2008 financial crisis — but this was the first time the political system gave them an opportunity to express it. T is often said that business in this country needs a licence to operate, although most people who use the expression don’t really know what it means. Well, perhaps they do now because the Brexit vote is the public’s way of withdrawing that licence. Broadly, it reflects the fact that to operate effectively, business needs the consent of the public and the support of politicians. It has gone a long way down the road to losing both.

So can governance adjust to meet this new challenge? Can it be reconfigured to give confidence to all stakeholders? If not, what is governance for and, more to the point, how does business get out of this mess?