Corporate governance: a cutting-edge code

Amidst the many calls for tougher regulation, some recalibration of the balance between regulation and corporate governance is inevitable, especially in the banking sector.

With the FRC’s review of the combined code underway, it is essential, however, that we fully recognise the role of good governance in fostering a successful market economy focused on long-term, sustainable wealth creation.

That said, the market-led approach enshrined in the code has to respond to changes in the business environment and the current review is timely. Given that it is mainly the banking sector under scrutiny and that the broad architecture of the code remains appropriate, however, care should be taken not to introduce changes across the corporate sector without them first passing a robust cost/benefit test.

There are areas where it would be worth considering reform to keep the code up to date. The FRC should, for instance, assess the effectiveness of investors in monitoring its application by listed companies.

Trillions have been lost by the collapse of banks and the general fall in stock market prices, hence searching questions are in order. Are sufficient resources being devoted by institutional investors to governance? Do their governance teams have appropriate influence when fund managers make decisions? How should investors react when they cannot secure the necessary changes in boardrooms by quiet diplomacy?

Other areas for review include boards’ explanations of how they have applied governance principles and the guidance related to the audit, nominations and remuneration committees.

The role of these committees and the disclosures made should both be considered. Should audit committees be doing more to ensure audits are subject to tender at reasonable intervals? How can nominations committees ensure searches for new directors are thorough? Are the remuneration principles fully aligning directors’ and shareholders’ interests?

Lastly, the operation of the ‘comply or explain’ mechanism and the overall quality of disclosure brings us back to the balance between the market and regulation.

Despite some challenges the system has worked fairly well in providing for flexibility within a structured framework but the possibility of introducing a more formal monitoring system is at least going to be on the agenda.

Anthony Carey is a partner at Mazars LLP