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Cracking the codes: Greenbury's influence

Sun, 6th Apr 2008

Not much more than a decade ago, the second of the UK's ground-breaking reports on corporate governance was headed by a certain Sir Richard Greenbury - who happened to be M&S's combined chairman and chief executive at the time. Sir Stuart Rose must be reflecting ruefully that, far from being attacked for combining those two roles, his predecessor was invited to pontificate on directors' pay.

Greenbury was building on the original report on governance by Sir Adrian Cadbury. Since then the edifice has been further altered and extended by others of the great and good: Hampel, who reviewed Cadbury and Greenbury (1998) Turnbull on internal controls (1999) Myners on investment (2001) Higgs on non-executive directors (2003) and Myners (again) on voting (2004). Between them they have constructed a comprehensive array of advice that has today acquired the force of holy writ.

Somewhat to its surprise, the combined codes have made the UK the corporate governance capital of the world, its principles-led rules being widely thought an advance on the rules-based regime of US. However, not everyone shares this Panglossian view. Critics charge that the effect of the combined codes is to enshrine shareholder value as the sole purpose of companies, and that, by focusing on principal-agent problems (how to ensure manager and worker 'agents' carry out the wishes of shareholder 'principals'), they simultaneously overemphasise the control function of the board at the expense of creation and entrepreneurship, and complacently sanction rocketing executive pay.

Moreover, although researchers have found evidence that investors would be willing to pay more for what they see as 'good governance', at least in its official version the latter doesn't appear to make companies work better: a 1998 meta-analysis of 85 separate studies showed that the proportion of independent directors on the board and the separation of the role of chairman and chief executive had no effect whatever on company performance.

Of course it's conceivable - although impossible to prove - that the codes have improved performance negatively, by preventing some otherwise-dominant individuals from leading their companies to perdition. On the other hand, they are certainly not foolproof. They were unable to stop manifest governance failure at Northern Rock, where the board comprehensively failed to challenge a high-risk lending strategy when conditions changed last year.

Indeed, the same could be said for the disarray of the financial sector in general. It seems a bit rich that those who failed to notice the impending systemic scandal of the credit crunch should now be quaking with horror at the idea of Rose's elevation to executive chairman at M&S.

Do the words 'swallowing camels while straining at gnats' come to mind?

The Observer, 6 Apreil 2008


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