After Enron: scandals end here

Though it was an avowedly American company, and the seeds of its downfall lay
in American laws and accounting standards – arguable even in American corporate
culture – the collapse of Enron set off alarm bells well beyond the United

After a spate of corporate scandals in late 2001, and the ensuing failure of
Italian diary giant Parmalat in 2003, regulators in many countries felt
compelled to seek improvements to the way companies were governed.

In the US, this resulted in the controversial Sarbanes-Oxley laws, which
precipitated a chorus of disapproval from corporates believing the legislation
had led to a welter of extra costs and spiralling paperwork. Even at home,
Sarbox has caused a number of UK companies, including ITV, to delist from US
markets – a complicated and expensive process.

For its part, the UK has gone down a different route, relying on a voluntary
set of principles, rather than a set of formalised rules. The Higgs, Turnball
and Smith reviews, which looked at various aspects of corporate governance, led
to revisions to the combined code in 2003, and led to new guidelines for board
composition, remuneration, auditing and communication with investors.

Though some observers still point to weaknesses in UK corporate governance,
most believe the new code is working well, spurring companies to implement best
practice, or to otherwise communicate with investors where they are failing to
meet the code’s requirements.

At the heart of the code lies the idea that companies either ‘comply’ or
‘explain’ to investors why they have failed to comply.

At the very least, this seems to be leading to better quality dialogue
between businesses and their shareholders over corporate governance.

‘There has been an increased willingness of companies to discuss their
departures from the provisions of the code with shareholders,’ says Peter
Montagnon, director of investment affairs at the Association of British

Most companies are complying with the ‘majority of provisions in the new
combined code’, he says. Montagnon notes, in particular, strong compliance in
the appointment of non-executive directors, and in adoption of processes to
evaluate board performance.

Ian Robertson, group chief executive and former finance director of
house-builder Wilson Bowden, is also broadly supportive. He believes the code
has clarified what is expected of companies, and led to more consistency.
‘Frankly, there are very few organisations that say “we’re going to do things
our own way”,’ he says.

The clarity of the code has made it easier to please shareholders who are
worried about corporate governance. ‘Gone are the days where a business would
please one group of shareholders, only to find another that was unhappy,’
Robertson says.

Fund managers, too, are generally happy with the changes. Anita Skipper, head
of corporate governance at Morley Fund Management, believes non-executive
directors are more accountable than they used to be.

Paul Lee, head of corporate governance at rival fund manager Hermes, agrees
that companies have taken huge steps recently, formalising how they recruit
non-executive personnel, with many now employing headhunters to search for
people with particular skills. He is confident that the UK’s approach to beefing
up corporate governance has worked better than the US tack.

‘There’s a completely different attitude. In the US, you’re guilty until
proven otherwise. In the UK, everyone’s working towards the same goals,’ he

Last December, the Financial Reporting Council announced, following
consultation with its members, that it would not be seeking any significant
changes to the code. Robertson, who is a member of the FRC, said there was
general agreement that the code was working to the benefit of both investors and

But there is a flipside. Robertson also notes that the new code has led to an
increase in compliance work. Compared to a few years ago, Wilson Bowden’s audit,
remuneration and nominations committees now spend double the amount of time
preparing paperwork. Wilson Bowden’s remuneration report, for example, is now
‘almost the same size’ as the company’s main accounts, he says.

Though he welcomes the code’s changes, Robertson says in practice it can lead
to over-formality and a culture of ‘box-ticking’, which may not always be

Nicholas Beazley, company secretary at BUPA, agrees: ‘The challenge for
companies is to not get things out of proportion.’

There’s no room for complacency. Indeed two recent surveys point to continued
weaknesses on the issue of non-executives. A study by researchers Roffey Park
and HR consultancy Cedar International, based on interviews with chief
executives, chairmen, and other senior business people, found that most board
members had little desire to change how they recruited NEDs. The authors
bemoaned a lack of diversity in UK boardrooms.

Another survey, this time from consultants Independent Remuneration Solutions
and recruiter Hanson Green, found that non-executive directors had little
effective oversight at companies where bosses had large share stakes.

Certainly, the new code seems to have changed the role of non-executive
director, increasing both responsibilities and liabilities for those taking up
non-executive positions. Robertson says that individuals taking up NED roles are
much more wary of what they are letting themselves in for. Companies, meanwhile,
are now forced to pay non-executives greater compensation, reflecting their
extra duties.

Frank Curtiss, in charge of corporate governance at Railpen Investments, the
UK’s seventh largest occupational pension fund, says the pressure is potentially
bad news for business. ‘I’m sometimes worried that we expect too much from
non-executive directors,’ he says.

Another worry, voiced by Morley’s Anita Skipper and her counterpart at F
&C Asset Management, Richard Singleton, is the recent arrival of Russian
and Kazakh companies to the London Stock Exchange. Singleton, who has written to
the Financial Services Authority expressing his views, says he is concerned that
the LSE, and the FSA, may not have properly screened the new companies, and that
corporate governance standards could eventually suffer as a result.

At an EU level, the European Commission is currently considering a number of
directives on corporate governance, aimed at smoothing procedures for
cross-border voting, and making it easier for continental shareholders to vote
at company meetings. EU commentators say the commission seems to be moving away
from firm directives, to a less-binding principles-based approach.

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