Corporate governance: behavioural issues

Have legislative and regulatory changes over the last five years made
the investing public any safer?

Gillian Lees:Some of the changes that have been brought in,
particularly in the UK, have been very useful. Shareholders, particularly the
big institutions, have taken a much more active role. The danger is that, in the
UK, we have this principle of comply or explain, whereby companies have to
comply with the corporate governance code and if they don’t they’ve got to
explain why. There has been evidence in the recent consultations by the FRC that
there’s a danger that we go into this with ‘comply or else’ and investors have
to perform their share of the bargain by listening to the explanations. That is
beginning to happen but there has also been some sort of boilerplate examples as
well. On balance I’d say there has been an improvement and I think the UK has
dealt with the whole debate very sensibly. It hasn’t jumped into doing a
Sarbanes-Oxley.

Brian Gregory: People tend to use the two words synonymously
but they actually mean different things. Compliance is just the process of doing
what needs to be done and governance is about running your business efficiently,
effectively and clearly. If you’re going to be a good governance company, then
you have to comply with the rules and regulations. Compliance is just the boring
stuff. Governance is trying to look at how you can comply and get more value
from it.

Has the pendulum swung too far towards regulation?

Tim Copnell: I think it has. Some US listed companies are
documenting as many as 250,000 controls and spending $5m on Sarbanes-Oxley
compliance. One really has to ask whether those boards and the management below
the boards are able to run the businesses effectively. Even on a UK basis, one
has to question whether we don’t need a period of calm, where boards can settle
down and get back to the business of creating shareholder value.

What are the potential consequences?

Tim Copnell: The real issue and the problem here is that the
legislation, particularly US legislation, requires both directors and auditors
to put their necks on the chopping block and state that the system of controls,
financial controls, is effective and that is always going to lead to
over-documentation, too much process and too much time spent in these areas and
arguably too much over auditing as well. To say something is effective is
certainly judgmental, and it will lead to people covering their backs and
protecting themselves by over-engineering the processes to support any further
claim.These statements will be looked at with hindsight. It’s easy to say
something is effective today and much more difficult to justify it’s effective
tomorrow if things go wrong unless you have a whole paper chase to support your
position.

Is there any chance of a dilution or is the best we can hope for just
maintenance of the status quo?

Gillian Lees: I think we’re always going to get the pendulum
effect. I remember when the Hampel Report came out in 1998, that was really the
first review of corporate governance following Cadbury. It said we’ve gone a bit
too far on compliance, we need to think about wealth creation and we’ve gone
back. Over time you get this pendulum effect. I feel quite optimistic as to how
it’s developed here and how it will move into behavioural issues. We’ve got a
lot of structures in place and I’ve heard quite a few companies, company
secretaries, corporate governance people in companies, saying they’re looking at
behaviour now. It’s one area where we can give ourselves a bit of a pat on the
back as a whole.

Is it the end of the road for the nasty corporate
‘surprise’?

Brian Gregory: The board should be taking a holistic
approach. It’s about managing wealth creation for the stakeholders and I think a
couple of things have come out from governance as a whole. One is the
realisation that it is about behaviour, so it’s not just failing to get numbers.

It’s a question of confidence so preventing surprises in the results that you
announce, preventing surprises around behaviours of individuals in the company,
is certainly very important. In the past you may have thought, well, we failed
to comply with X, we’ve been fined a bit of money, but it’s not very serious.
The market’s moved on.

Now there is a greater penalty for failing to comply so governance as one of
the things you look for as a stakeholder ­ and I use the word stakeholder to
mean an employee, a vendor, a customer, an investor. It’s important in a way
that it wasn’t maybe five years ago. But that in itself will not prevent
surprises happening. We saw it with Shell and the effect of miscalculating
the oil reserves.

One thing that’s positive is that governance has enforced on management the
need to make sure that they have a culture of no surprises. I use surprise
rather than risk because risk has negative connotations so if you’re managing
risk then you need to be risk averse and that’s not normally a good thing.

This week’s experts:

Tim Copnell, director of corporate governance at KPMG and
head of the firm’s Audit Committee Institute

Brian Gregory, chartered accountant and senior director of
financial applications at Oracle

Gillian Lees, technical specialist at CIMA and contributor
to the CIMA/IFAC report on enterprise governance

Chaired by Damian Wild, group editor in chief of
Accountancy Age and Financial Director

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