Codifying corporate governance – where are the limits to limiting risk?

UK Codes: Turnbull, the new 2024 code, Cadbury

The latest, 2024 variant of the UK Corporate Governance Code isn’t a major one. There are tweaks here and there – and increased attention to risk management, 25 years (how time flies!) after the Turnbull report on internal controls (1999) urged everyone to escalate risk to a persistent board-level concern. A damp squib?

The packages of measures will apply to UK listed companies from next year, but if history has a lesson, this code may have far wider impact. The UK code has informed corporate governance arrangements around the world. And not just for companies listed on stock exchanges. Organisations across a wide range of forms – partnerships, charities, even government departments, in Britain and beyond – have adopted the central tenets of the UK code.

In response to a 2022 government call for reform, titled “Restoring Trust in Audit and Corporate Governance” (see note below), the Financial Reporting Council conducted an extensive consultation. Some 226 written comments arrived (189 of which were made public). The responses involved a rough balance between companies, investors, advisers and associations, with about 9% coming from “others”, mainly individuals. Moreover, 5,000 or so people took part in roundtables and other events, making this perhaps the most thorough airing of the issues in the 40-year history of UK corporate governance policy.

And yet this code doesn’t feel like a breakthrough, despite being prompted by a string of corporate failures – one particularly pertinent to the government itself – at least as severe as the ones that led to the original Cadbury Code (1992). Perhaps that’s because the code, through its various iterations, has led boards of directors to work harder, correcting the obvious failings of process in what is a notoriously complex field. But maybe there are a couple of other reasons:

• Has codification reached the limits of its effectiveness? From the outset, when Sir Adrian Cadbury proposed a standard that came to be called “comply or explain”, making the code a voluntary requirement (Nordberg, 2020). If so, voices for stricter standards may want to turn to law and regulation.

• Or is it that balances of power – including the declining significance of the London Stock Exchange to the British economy and global finance, and the role of British companies in innovation – are now too fragile to rein in further the discretion of corporate management? The LSE seems a shadow of its former self, lacking the depth of capital of New York, the deepening integration of continental European markets, or the dynamism of Singapore, Australia and India. One sign of that loss of status is the decision of one of the FTSE 100 companies to move its main listing to the US. Which means losing in place in the index and the investors that attracts (or fails to), as well as not needing to comply with the UK code. And this: How did an online gambling business come to be one of the “powerhouses” of British industry?

Law and regulation have always seemed too blunt an approach to deal with complexity and singularity of the problems individual businesses face. Even a Labour government – which seems likely to result from the election due this year – has signalled its friendliness to business.

What the new version of the code does, however, is to build incrementally on what’s come before. Not a bad thing – maybe. But it’s not going to set the house on fire, prevent any fires from starting, or put them out when they do. That’s the thing about risk. Without fundamental change, it never goes away. It just goes into hiding.

Is corporate governance a problem that just won’t admit of solution?

[NB: The title of the UK government call for a consultation, “Restoring Trust in Audit and Corporate Governance,” echoes the report of a US commission report that followed to 2001 collapse of Enron and the 2022 collapse of WorldCom (Breeden, 2003). NB: After a rescue WorldCom became known as MCI. May, how times don’t change!]

Breeden, R. C. (2003). Restoring Trust: A Report on Corporate Governance for the Future of MCI, Inc. Retrieved from http://www.ecgi.org/codes/documents/breeden_cg_report.pdf

Cadbury, A. (1992). The Financial Aspects of Corporate Governance. Retrieved from https://www.ecgi.global/code/cadbury-report-financial-aspects-corporate-governance

Nordberg, D. (2020). The Cadbury Code and Recurrent Crisis: A Model for Corporate Governance? Cham, Switzerland: Palgrave Macmillan.

Turnbull, N. (1999). Internal Control: Guidance for Directors on the Combined Code. A report to Institute of Chartered Accountants in England and Wales. Retrieved from https://www.ecgi.global/code/internal-control-guidance-directors-combined-code-turnbull-report