Anne Simpson
Executive Director, International Corporate Governance Network (ICGN)
Member of the Global Corporate Governance Forum‟s Private Sector Advisory Group
Belgrade – November 15, 2006
Improving Corporate Governance through Best Practice Codes: the UK Perspective
It‟s a great pleasure to be here, thank you for inviting me. I think the reason I have been invited is
because the United Kingdom was the first country to invent a corporate governance code. So,
what I want to talk about are three things:
Firstly, why was the code produced, what did the UK want to achieve?
Secondly, what impact did it have? Did anything change, did it build investor confidence and did
it raise standards?
Thirdly, what are the lessons learned? Is this just something that can be copied successfully? We
know it‟s been copied, there are now over fifty countries with codes of best practice but some
have no impact. Among countries with that problem there are European countries, like the
Netherlands and Germany. They produced beautiful codes and little happened. There are also
developing countries where codes were produced but the country had to go back to the drawing
board and start the process again when they realized there was little impact.
I‟d like to explain a little of what did happen in the UK and how the development of a code of
best practice was organized in way that made a difference as is particularly obvious just from
looking at the document itself.
Why was the code produced? It was simply a response to appalling corporate scandals. We are all
probably familiar with the disasters of Enron and Parmalat. Still, if you go back fifteen years, the
scandals that were on everybody‟s lips were Maxwell and Polly Peck. These scandals shook the
UK market in just as dramatic way as Enron and Parmalat shook the US and European markets.
We were in a situation in the UK when the Conservative government led by Margaret Thatcher
committed itself to privatization with the idea that the British people, if they became
shareholders, would begin to understand and support the market because their own money was
tied up in it. This is a rather curious idea in the first place because most of the shareholders in the
UK are pension funds. And actually that is money which ultimately belongs to the ordinary
working people anyway. There was a wave of privatizations, with a political philosophy of
laissez-faire – let the market decide what ought to happen. In the midst of which came disastrous
company collapses including companies which were in the FTSE one hundred index of leading
companies. These were companies with clean accounts which were signed off by the auditors.
The Financial Reporting Council, then a self regulatory body, realized that these collapses
threatened and undermined public confidence in the market and the whole process of financial
reporting and auditing.
The Financial Reporting Council took the initiative and brought together a group of institutions to
do something. They were not given a mandate by anybody to develop a code but what they did,
which was very important, was decide that if things were going to change all relevant parties
needed to be sitting around the table to agree on a plan of action. So, the parties around the table
were: the Financial Reporting Council, the Stock Exchange, the Bank of England, representatives
of shareholders and the business community. The next thing that was important was the
appointment of the credible leader, which was Sir Adrian Cadbury. He had not only been
chairman of an extremely successful company, Cadbury‟s, he was on the board of the Bank of
England, and involved in the financial reporting community. It was extremely important to have a
leader who had the respect of all sides. Cadbury understood very well that this was not a matter of
fixing the system to work for the few; he understood very well that the corporate governance
system was about the process of holding the corporate community accountable for its actions, that
enforcing transparency and accountability was fundamental to the legitimacy of the market
system.
The next question is: did it have an impact? The answer is “yes” in the UK, the impact was
dramatic. I would like to give you one example. It was normal at the time when the code was
developed for the Chairman and chief executive‟s roles to be combined. This is still normal in the
United States. Why is that a problem? The chairman‟s job is to run the board. The chief
executive‟s job is to run the company and the board needs to look at what the chief executive is
doing. If the chairman and the chief executive happen to be the same person it is very hard to see
how you monitor and hold accountable the chief executive. It is a very „pleasant‟ position to be in
- if you are the chairman and chief executive… There are also issues with regards to
remuneration, the composition of the audit committee and the nomination process over which a
combined chairman and CEO can have influence. Over a period of five years, the number of
combined posts diminishing rapidly. In other words, the heart of power on the board was being
tackled and that was the most sensitive and difficult issue to tackle. The Cadbury Code had
actually framed the issue in a rather gentle and delicate way. It did not say dramatic and
revolutionary things; it simply called for the balance on the board.
Why was it possible to get to the heart of power on the board and separate these roles? The real
reason is shareholders. The enforcement mechanism for all this good advice in the Code was not
the government, not the regulator and, to be fair, it was not the stock exchange. What actually
began was a movement for shareholder activism. This was an absolutely critical element in taking
the Cadbury Code advice and turning it from principles into practice. Because shareholders began
to vote, to push companies to comply, or to have conversations if they did not comply, to explain.
Is this “comply or explain” really a conversation? Yes it is. At the moment, shareholders do have
rounds of discussions with companies and where there are some issues with companies and
compliance, very often they are able to make some sort of a deal. In other words, there is some
room for maneuver, there is flexibility. The other issue that is important to mention is that since
Cadbury and his team put the code together we have had the succession of other committees, so
we have something which is now called the Combined Code. The combination in this code is
Cadbury advice followed by the committee formed some years later by Greenbury, which was
meant to be dealing with the executives‟ pay (which was not solved, so we have a mixed record
there), followed by Hampel, chairman of ICI then, followed by Turnbull on internal controls and
Higgs on non-executive directors. So the lesson learned here is that once a code is written it is a
question of ongoing development and maintenance. The content of the code has to be broadened
and developed in line with raising expectations by shareholders.
The final point: to what extent can the UK model be copied? The lessons are that:
Number 1- If you do not have everybody affected by and in a position to influence the outcome,
the code will simply not have an impact.
Number 2 – You need leadership: credible, neutral leadership; somebody who is respect by all
sides. And I say this with humility because the person who came after Cadbury was Greenbury
whose style was combative. He did not command respect on all sides and the solutions he came
up with were not very well though through and some backfired almost immediately.
Number 3 - The process of consultation is key. The Cadbury committee spent more time in
consultation after it produced its code than it did sitting around the table thinking about what the
code ought to be. Consultation was open to the public and every single submission, and there
were hundreds, was responded to. Cadbury ensured there was a reply and a note from him
thanking the contributors who ever they might be. The press had become very interested and
Cadbury understood very well there was a public interest in this and that the process of
consultations was vital to rebuild the confidence in a sense of legitimacy for corporate power.
My final point is about enforcement. Who is there to make it happen? Shareholders were there –
they were involved in development of the code from the very beginning. Shareholders were in the
spot light, there were active running campaigns and being very public in their criticism and that is
what really transformed the corporate governance world in the UK.
Codes of Best practice are not a panacea. There are examples where it worked and where it did
not work. There are potentially tremendous benefits in boosting investor confidence, building
legitimacy in the public markets and raising standards in the boardroom. Copying the content of
the code of any other market is really not the issue. It is in thinking about the process, most
importantly how you are going to bring your shareholders, your banks or your capital providers
into playing a role in the development of a code, its promotion and ultimately its enforcement.