OPINION - Time to rethink corporate governance

Corporate governance is currently at a crossroads. Cadbury was designed to bring about more openness, integrity, accountability and confidence.

Greenbury has created yet more accountability and the scene is set for livelier AGMs.

The European Union is also active once more in the governance arena and the Commission is asking questions about whether it rather than the member states should be taking the initiative. The big questions are whether there should be further corporate government requirements and if so who should introduce them.

Much depends on what the Hampel Committee does and whether it will be given a fair hearing. The danger is that everyone who has a wish list will make a great deal of noise if their particular ideas are ignored.

Such ideas include more rules on involving employees, related party transactions involving NEDs, directors’ contracts, individuals having too many directorships, over-aged directors, performance criteria for directors’ remuneration and more accountability and voting responsibility for institutional shareholders. We therefore face various possibilities including a move to even more box-ticking or more radical solutions.

In order to develop a way forward which is suitable for the long-term success of UK plc, it is necessary to perform a stock take. Cadbury and the way it has been enforced has been very successful. Greenbury is now requiring UK companies to disclose more information on directors’ remuneration than other European countries. However, we shouldn’t lose sight of where the corporate governance debate began. It commenced in the shadow of Maxwell and similar crises.

One way forward was identified by Sir Sydney Lipworth speaking last year at the English ICA’s Corporate Governance Seminar when he said that ‘all businesses face significant risks and no matter how entrepreneurial the management, they need to focus on these risks’. We therefore need to encourage boards to retain oversight responsibility for business risk, to delegate some of this to the audit committee and to ask more questions about the quality of information they are given and the role of management.

Answering these questions does not require more codes but it does need encouragement for boards to spend more time on strategy development and risk management.

Budgets should also be set aside to provide all members of the board with training to fulfill their roles as directors. More focus should be placed on succession planning not only for executive directors but also for NEDs, who should be paid more than a typist and thereby given more encouragement to invest time in providing input into the strategy setting process and to developing the questions which can help prevent future scandals.

This should be an area of experimentation (rather than imposition) and of creating an environment in which strategic initiatives and risk management move together rather than against each other.

Auditors should not be immune from the need to think about business risk.

Indeed, the auditing profession needs to ask itself serious questions about whether the audit risk model which underlies auditing standards serves auditors well. More focus needs instead to be put on their clients’ business risk. Also, instead of developing more operational process standards, the profession should focus on making the audit output more relevant to an appreciation of business risk. There is also scope to develop new assurance services in the area of business risk.

And who should be responsible for making any changes relating to corporate governance requirements? My view is that the European Commission should avoid getting involved. It opens up the spectre of supervisory boards blissfully ignorant of the real issues and making ill-informed judgments.

If there is a role for the Commission, it should encourage some governance deregulation of petty box-ticking in member states such as the UK, which have far more requirements than other countries.

Also, the mechanism which was so successful under Cadbury – Stock Exchange backing – should continue. Standing committees on governance will only create mountains of red tape, putting the emphasis on more requirements until UK plc becomes ungovernable.

In short, we must avoid creating governance overload and instead focus on the elimination of corporate crises.

Martin Scicluna is chairman Deloitte & Touche.