A little known birthday came and went yesterday. The Financial Reporting Council even threw a bit of a party to celebrate. It was twenty years to the day since the Cadbury Report on corporate governance was born.
Since then, the child, as you might have expected, has grown like topsy and become the man: the Combined Code.
The great and the good – Greenbury, Hampel, Turnbull, Higgs and Smith – fed the lad well, but as Anthony Hilton commented in the Evening Standard yesterday, though the Combined Code, “is many times larger than the original slimline version of Cadbury, it is probably not much more effective. The truth probably is that codes – like everything else – are subject to diminshing returns and authorities acting in haste [following a corporate disaster] do not necessarily add much value.”
Much the same of course could be said for the provisions of the Companies Act 2006 which were added to codify directors duties. At the time the Act was introduced, the government maintained that the Act was merely seeking to make the established common law position more accessible. They largely achieved the opposite. So-called principles of ‘enlightened shareholder value’ were introduced – non-exhaustive lists of matters directors are supposed to take into account in their decision making processes, that must have been dreamed up by someone who had never run a business, and which leave most actual business people scratching their heads. The result is that directors run their businesses the way they always have, doing their best to run their companies well to turn a profit. The only difference is that the compliance industry has grown to help them write suitable board minutes to create a proper paper trail. I wonder to what end and at what price?
The other side of the accessibility argument was the apparent desire to make boards more accountable to shareholders (or rather, minority shareholders in particular). So the 2006 Act also introduced a new power for shareholders to bring a claim on behalf of the Company against the directors for negligence, default or breach of duty or trust. But five years on since the power was introduced, the courts have rarely ever been called upon to look at it and at the time of writing, I am not aware of any successful derivative claim based on the power.
Here’s the thing: from time to time in corporate life, there will be wrongdoing and no amount of regulation is going to stop it. Arguably, the greater the number and complexity of the rules, the easier it will be for the fraudster to hide his misdeeds, the more readily the honest but mistaken will trip up over their own shoes.