Will the proposed corporate governance laws improve a company’s ethics?

by David Jackman for Times Online, April 15, 2010
A raft of corporate governance rules and regulations are on their way. The Walker Review, the resultant changes to the Combined Code and the Financial Reporting Council’s (FRC) stewardship code for institutional investors, the consultation on which closes tomorrow, all highlight systemic failings of ethics and corporate governance as an important cause of the financial crisis.

All three attempt to “do something about it” but what can be done and is it possible for the wrong kind of regulation to make matters worse? Are regulators straying into uncertain territory where they are ill-equipped to tread or are they finding a new and fruitful path in seeking to alter behaviours and engender a longer term, more sustainable and responsible view?

It is difficult simply to tell someone, or an organisation, to be more ethical. But equally, prescriptive regulation, particularly regulation of process, does not necessarily produce desirable results either. Indeed, any excessive rule writing in the corporate governance area is likely to be counter-productive.

A tick-box approach can develop a culture of dependency and undermine any sense of ownership of industry good practice. If firms cannot see the wood for the trees they might be more inclined to focus on the minutiae while missing the significant issues – as in 2008.

Dealing with ethics and values is a delicate matter and requires a good deal of finesse. If it is intended to develop a more ethical corporate culture, the necessary commitment needs to be nurtured and coaxed through a range of carrots and sticks, a balance between structures and freedoms….(continue reading)

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