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17 September 2012
Successive banking crises and private sector failures have led some to question capitalism generally, but also company leadership, incentive structures, and even the trustworthiness of UK Plc. Corporate governance is at the heart of this debate, and it is crucial that the framework in the UK supports and empowers managers and owners to behave responsibly and in the right interests.
Last week Reform held two roundtable discussions on the theme of “Strong corporate governance”. They brought together interested parties from the UK and Scandinavia to discuss the differences between the regions’ models of corporate governance. In Sweden, boards are accountable to owners and institutional investors are active and engaged. At the same time, Swedish companies have performed relatively well while executive remuneration is among the lowest in the world. Both events were held under the Chatham House rule.
While observers have been quick to criticise the UK model of corporate governance, it is one of the strongest models globally; the best aspects of which have been copied around the world, including in Sweden and Finland. Despite this, the UK is still dominated by “ownerless corporations” – a symptom of the structure of the UK’s capital markets. This is in stark contrast to Sweden, where owners are in full control of the business, with major shareholders sitting on the board of directors.
UK PLC shares are very liquid, attracting global investment and driving a successful market. Critics argue however, that it weakens shareholder power and leads to boards acting in their own interests rather than in the interests of owners. Perhaps the most striking example of this is over executive pay, where short term incentives do not appear to have been aligned with long term performance. Yet stronger shareholder power may not deliver more long termism, as investors do not all want the same thing (for example, the duty of a fund manager is to the investor – not to the company in which they are invested – who may be looking for short term gains). Further, a focus on the long term does not necessarily lead to better decision making (and similarly, companies that underperform are not necessarily governed badly).
While there is very little empirical evidence to support one model over another, it is clear the diversity and number of company owners, the time horizon of investments, and the active or passive nature of equity shareholdings, can affect the quality of governance. Yet one size may not fit all. While some would like to see shareholders appointed to the board, or adopt a private equity style model, for others it would be enough to see boards actively consulting with shareholders.
There is also concern over contradictions in policy. While efforts are being made to strengthen shareholder power (through binding votes on remuneration committees, as one example), regulation separating retail from investment banking (and requiring retail banks to appoint independent boards) will further erode the strength of shareholders. At the same time, EU regulation is further weakening company owners. There was broad criticism of top down regulatory decisions, such as female board member quotas, which could undermine the quality of boards and decision making.
The discussions revealed that at the core of any governance system is the creation of value for a firm, ultimately to benefit shareholders. Further, it is important to consider that the perceived problems with governance may not be endemic within our corporate culture (it has been suggested that UK banks distort the picture and could be considered as a special case). What can be agreed is that shareholders and boards must encourage transparency, accountability and long-term stability in order to promote long term growth and help UK businesses to regain public trust. The best model of corporate governance will be the one which can deliver this.
Reform roundtable seminars on “Strong corporate governance”, with leading representatives from the UK and Scandinavia on Monday 10 September 2012.