The US reaction to the Enron collapse was the stifling Sarbanes Oxley legislation. Britain does things differently, preferring the soft law of best-practice guidelines, but we do it more often. It is just six years since the Higgs code was imposed on UK companies but already it is being reviewed for a third time.
The code designed to stop a British Enron proved no more effective than the US legislation in preventing a banking crisis so the UK is making its soft law harder.
The Financial Reporting Council, guardian of Britain’s governance codes, has its own agenda for telling chairmen how to run their boards and telling boards how to control their chairmen, but as warned on this blog when Sir David Walker produced his review on banks’ governance, there is now a movement to make all companies subscribe to the bank rules.
Even though Walker produced his interim review only in July 2009 and will not finalise it until the autumn, FRC is now wondering whether to impose it on all listed companies or just a sub-group such as the FTSE 100 or 350.
The FRC’s report on its Review of the Effectiveness of the Combined Code, published at the end of July, lifts the sections of Walker Review it thinks could be suitable for non-financial companies. That includes defining the roles of non-executives, senior independent directors and the chairman. It spells out their time commitment (two-thirds of the chairman’s week and 30 or more days for non-execs). It also advocates the annual re-election of committee chairmen, training and development for non-execs and the creation of risk committees producing their own annual reports.
That means not only punishing all businesses for the banks’ failings but extends a trend that already turns companies into corporate clones, run by well-meaning non-executives while full-time employees are increasingly excluded from the boardroom.
If the UK code has to be rewritten again it needs to reconcile how non-executives should both be independent of the company but experienced in the business. It must not make directorships so onerous that the best candidates shun the role or are excluded by proscriptive rules: it is hard enough to find committee chairmen now, even before personalizing their role with an annual re-election. And the code must stop pretending it is flexible when companies that diverge from the rules are castigated by shareholders.
The UK way may be to avoid legislative corsets like Sarbanes Oxley but it encourages companies to take a legalistic approach in complying with the words, rather than the spirit, of the code. Many companies explain that they have not complied rather than explain why they have deviated.
A wave of codes, guidance and laws is about to hit companies as the stable door of the banking crisis is belatedly slammed shut. The Financial Services Authority’s remuneration code takes effect in January,
European rules on pay become law this year, the UK parliament is advocating legislation and the FRC is clearly working in tandem with Walker.
There will no doubt be yet another rewrite of the UK code within a couple of years but British boards need to pick up the cudgels now: the rules are never relaxed on review.
