Corporate governance reform: Cable means business

by Ian Fraser for QFinance, November 1st, 2010.

The corporate governance model that existed before the crisis may not be entirely broken, but it is certainly in need of a major overhaul. In recent weeks there have been several initiatives intended to disassemble the stalled engine, take a long, hard look at the oily mess within and then seek to reinvent it as something that actually works.

The corporate governance failures that contributed (or caused) the global financial crisis of 2007-10 included:

  1. Failure by non-executive directors to control headstrong chief executives.
  2. Institutional investors drove corporate managements to take outrageous risks and to pursue unsustainable growth strategies.
  3. Flawed incentive programs that drove directors to pursue unsustainable strategies that were incompatible with the long-term interests of investors.
  4. Auditors who became too “cozy” with clients, were insufficiently sceptical about asset valuations and failed to spot corporate fraud. 

One of the current crop of initiatives intended to shake things up is a green paper from European commissioner Michel Barnier.

This isn’t published yet but has already been sparking a degree of terror in the City of London. This is because Barnier favors tightening up the rules and regulations covering corporate governance – for example forcing investors to vote their shares – and has little truck with the more porous “comply or explain” approach favored by the UK market.

The UK seems determined to pre-empt any unwanted rules-based invasions from continental Europe. It launched the Walker Review of the governance of financial institutions, dismissed as “anodyne” and “a crashing disappointment” when published in November 2009. In July the Financial Reporting Council, the UK corporate governance regulator, unveiled a voluntary Stewardship Code, which includes seven principles requiring signed-up investors to disclose how they will push for corporate change, how they vote, and how they scrutinize corporate behaviour. (continue reading… )

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