Phillip Inman – Standing up for shareholders

Who will police the corporate governance codes drafted by the three knights Adrian Cadbury, Richard Greenbury and Ronnie Hampel?

Currently, there is only one proposal on the table, giving the job to the Stock Exchange. If the proposal goes ahead the Exchange will take charge of the three codes and re-write them into one supercode. But the Exchange’s idea of policing will almost certainly leave shareholders little further forward than they were five years ago, when the debate began.

Under the scheme, every listed company will include a statement in their reports setting out if they have followed the codes. That’s it.

If the directors of a listed company want to abuse every code, they can make a statement to that effect in their report. What will the Exchange do? Nothing. The codes will be kept out of the Exchange’s main set of rules, the Yellow book. Instead, they will sit alongside the Yellow book more as a ‘handy hints’ guide than as a series of commandments.

The policing role is, in fact, left to shareholders. What directors say in the report is a matter for individual investors to follow up and punish if they see fit. Shareholders, of course, have plenty of resources to carry out this kind of checking, when they are of an institutional variety.

But what about individual shareholders? Their resources are few. They have only one forum to voice any concerns that board directors are avoiding the codes: the agm. Yet the agm, as a democratic forum, is worse than the trade union annual conference circa 1979. Institutional investors wield their power and block votes without even turning up to justify their actions.

So, yet again individual shareholders have been told they count for little in the City money-go-round. The Exchange cares only for the big boys and they will know what the directors are up to anyway.

Maybe the prospect of further abuse of the code under this arrangement will force DTI minister Margaret Beckett to take action. Proposals for a new Companies Act could see her assume the role of the enforcer – with a licence to blow away irresponsible company directors. Maybe directors should watch out.

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