Diversity in Corporate Governance (CIMA, 2006)

A more realistic global perspective than the convergence thesis is that there will continue
to be considerable diversity both in the forms of corporate governance around the world. Different
traditions, values, and objectives will undoubtedly continue to produce different outcomes in
governance, which will relate closely to the choices and preferences people exercise in engaging
in business activity. If there is convergence of corporate governance, it could be to a variety of
different forms, and it is likely there will be divergence away from the shareholder oriented
AngloAmerican model, as there will be convergence towards it.
Corporate governance development in the USA, UK and Europe
We shall now consider the development of corporate governance rules in the USA, UK
and Europe.
USA
Corporate governance rules in the USA have developed from relatively little to the complex
Sarbanes-Oxley Act of 2002.
Three main drivers for this were:
(a) Active management: Increasing shareholder activism from institutional investors and in
particular fund managers brought the actions and behavior of senior corporate managers
to the public's attention. This was driven in part by the increasingly protective practices of
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directors in preventing takeovers which some investors thought went against their best
interests.
(b) Enron, Arthur Andersen and Worldcom The collapses of Enron (see case study below)
and Worldcom encouraged the US government to take action to restore public confidence
and trust in large corporations. The Sarbanes-Oxley Act of 2002 introduced measures to
protect investors from further corporate disasters by implementing reporting procedures
aimed at increasing the accuracy of disclosures and the openness of corporations. While
Enron no longer exists, Worldcom did survive and merged with MCI International following
successfully emerging from bankruptcy.
(c) Close relationships between auditors and clients Enron also revealed that far from being
independent, auditors often enjoyed very close relationships with their clients, In Enron's
case, its auditor (Arthur Andersen) undertook lucrative consultancy work. The threat of
losing this valuable income compromised the auditor's ability to give a truly independent
report. Andersen was found guilty of obstructing justice as a result of the investigation into
the scandal (although the decision was subsequently quashed). Andersen still exists today
but it is very small and mainly deals with lawsuits against it. The Public Company
Accounting Oversight Board was created by the Sarbanes-Oxley Act and was given the
role of policing auditors. All auditors of public companies must be registered and comply
with strict rules on ethics and audit procedures. Restrictions are in place to prevent
auditors performing certain audit and non-audit work for clients and they must disclose
audit and non-audit income separately.
UK
Three significant government committees (Cadbury, Greenbury and Hampel), were
commissioned during the 1990s in response to the increased need for good corporate governance
in light of several corporate scandals including the collapse of Asil Nadir's Polly Peck, the pension
scandal of Robert Maxwell's Mirror Group and Guinness's illegal share support scheme involving
Ernest Saunders. Other UK corporate scandals involved Barings Bank and BA.
Corporate collapses such as those mentioned above not only affect the stakeholders
involved – such scandals reduce overall investor confidence in the markets, as directors are not
being seen to be effectively controlled. For a country such as the UK which has a tradition of
investment and respected financial markets, resolving this issue was massively important
economically.
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The recommendations of the committees were incorporated into the 1998 Combined Code
which companies listing on the London Stock Exchange are required to comply. Since then, three
further committees reported (Turnbull, Higgs and Smith) and their recommendations were
incorporated into the 2003 Combined Code. This Code is regularly revised; the latest version
being published in 2008.
The Cadbury Committee Report 1992
A joint initiative between the Financial Reporting Council, the accountancy profession and
the London Stock Exchange saw a code of practice created that all listed companies should follow
as a condition to being admitted to the stock exchange.
The Greenbury Committee Report 1995
This report was aimed at curtailing the publicly unpopular 'fat cat' salaries of many
directors, especially those in the privatized utilities. Most of the findings were incorporated into
the Listing rules of the Stock Exchange in late 1995.
The Hampel Committee Report 1998
The Hampel report combined and improved on the work of the Cadbury and Greenbury
Committees. In June 1998 it was given effect as a code of good practice when the London Stock
Exchange embodied its recommendations into the 1998 Combined Code. Failure to follow the
code could result in a fine or delisting by the London Stock Exchange.
The Turnbull Committee Report 1999
This report decided that the board of directors should be more active and involved in
internal control procedures and risk management. In particular, the board should be responsible
for:
(a) Evaluating sources and types of risk that the company is faced with.
(b) Providing effective safeguards and internal controls to manage, prevent or reduce the
risks.
(c) Ensuring the transparency of internal controls and providing an annual risk
assessment.
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The Higgs Report 2003
The Higgs report identified the need for non-executive directors to play an increasingly
important role in the running of a company, and that the board as a whole should accept collective
responsibility for the results of the company and its actions. It recommended the use of the unitary
board structure instead of other structures common in French and German corporations. This
report was the UK's response to the Enron disaster in the USA.
The Smith Report 2003
The Smith Report produced guidelines to help audit committees perform their role
effectively and also contained essential requirements that all committees should meet. The
'comply or explain' principle applies to these requirements, but the report also states that best
practice involves going over and above these requirements.
Europe
The European Commission has taken the view that corporate governance matters should
be left as a matter for individual states to deal with and was the subject of an announcement in
2003.
The Commission did recognize that a common approach was necessary for certain
fundamental issues (such as directors' remuneration, disclosure and access to financial
information and the management of independent non-executive directors) so it developed a series
of Directives as a basis for all states to follow.
In October 2004 the EU Corporate Governance Forum was established with 15 members
representing various stakeholders from across the EU with the objective of coordinating corporate
governance between all member states.