Codes of Corporate Governance Practice
The Financial Reporting Council (FRC), which oversees issues of corporate governance, has been busy recently. In June it published an updated UK Corporate Governance Code. Now, this month it has published the companion UK Stewardship Code for institutional investors. So we now have both sides of the governance coin, ready for implementation, the considered regulation by City insiders to prevent a repetition of the banking excesses which landed us in such a pickle two years ago. What do they amount to?
The Corporate Governance code introduces itself with fine words claiming its purpose “is to facilitate effective, entrepreneurial and prudent management that can deliver the long term success of the company.” Leaving aside the mixed message of entrepreneurial and prudent, how does it aim to fulfill that purpose? By laying down principles about company leadership, effectiveness, accountability, remuneration and relations with shareholders. But they are all rather mealy mouthed and offered on a ‘comply or explain’ basis. For example, under accountability, rather than requiring auditors to be demonstrably independent (eg by excluding them from other in-company roles such as management consultancy), it merely requires that, if auditors do provide other services which obviously compromise their independence, the company should explain to shareholders, how the auditor’s objectivity and independence is safeguarded.
The requirement to explain to shareholders is the key. Governance practice is not at all concerned with real business issues such as technologies, products, markets, competitors, customers or employees, just “the issues and concerns of major shareholders”. What are these issues and concerns? They are explained in the Stewardship Code as “the long term returns to shareholders” and “to minimize any loss of shareholder value.” Thus the FRC is simply lubricating the Friedmanite philosophy of making as much money as possible for stockholders. Inserting the warm and friendly phrase “long term” actually adds nothing. In any particular situation – think hostile takeover bid – the long term is bound to be dominated by the short term, if not immediate, returns to shareholders. Fine words can’t disguise the real purpose of these codes, to protect the idea of shareholder primacy above all other considerations.
These two codes of practice will clearly not change the way things are done. And that was presumably the intention. As the FRC boss, wife of the moat cleaning ex MP, explained: “Disclosures made by institutions under the code should assist companies to understand the approach and expectations of their major shareholders.” So, that’s alright then.