The Debate: Will Higgs strengthen corporate governance

Higgs means better relations

By Colin Melvin

The Higgs review has had a significant impact on corporate governance in the UK. On publication, it sparked a lively and healthy debate on the role and effectiveness of non-executive directors, which was widened to include the nature of the relationship between companies and their shareholders.

However, the extent to which Higgs ‘works’ will depend on the success of its attempts to strengthen the framework for corporate governance in the UK. This framework, which is increasingly being emulated overseas, is for the most part based on self-regulation through the establishment and observance of the combined code’s best practice guidance.

A key feature is the process whereby companies either comply with best practice or explain to their shareholders as to why they do not. Prior to the Higgs review, it was considered that the ‘comply or explain’ process could be more effective. In particular, companies’ explanations for diverging from best practice were frequently unspecific or ‘boiler plate’ in nature, and investors lacked the resources and commitment to consider fully the reasons given for non-compliance.

For us to be confident that ‘Higgs is working’, companies and investors would need to address these deficiencies. We would also need evidence that companies are starting to respond to the changes made to the combined code consequent to the Higgs review, and to make use of the review’s excellent additional guidance, which appeared in its annexes.

On the current evidence, I think it is probably too soon to say that Higgs is working. Indeed, most companies’ statements of compliance or explanations in relation to the revised code are not required before early 2005.

Nevertheless, Higgs has had an impact in one important respect – there has been a clear increase in communication between companies and shareholders, which has gone beyond mere discussions of compliance.

It is through such improvements in communication that corporate governance must develop.

  • Colin Melvin is director of corporate governance at Hermes Pensions Management.

It’s all about communication
By Michelle Perry

The Higgs review was viewed by some as a panacea for all sins against high-quality corporate governance. Derek Higgs, however, never planned his findings to be the Holy Grail. He set out, and on the whole achieved, an overdue shake-up in corporate governance in the wake of a series of scandals that rocked the investor community the world over.

And just days before Higgs takes effect on 1 November, we can already see how company directors are heeding the new rules. But it may not be quite how the investor community envisaged.

Just last week, Barclays and WH Smith announced their chief executives officers would be stepping up to the chairman’s role.

Of the ‘comply or explain’ options, both companies choose to explain.

The original Higgs draft contained a provision stating that a chief executive should not go on to become chairman of the same company. After some hoo-ha a redrafted version of the code was finally released.

The redrafted code takes the same stance, but has expanded the provision, setting out the procedures (such as consultation with major shareholders) that a board should take, in the exceptional circumstance when it does decide the chief executive should subsequently become the chairman.

Barclays said they had spoken with institutional shareholders about their decision, but that ultimately ‘it is a decision for the board’.

But investor groups still aren’t happy with the situation.

If the new code is to work effectively, the paths of communications must be revisited. Lobbying groups claim it’s not enough just to state you’re not going to comply, there’s got to be ‘a proper explanation’ that the man on the street understands.

Whether company directors like this notion or not, that’s the way it must be. If the ways and means of communicating information are not altered both parties, directors and investors, stand to lose. But if they work together to understand each other better then both will be winners. It’s all about communication you see.

  • Michelle Perry is features editor of Accountancy Age.

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