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The collection draws on the experience of a wide range of individuals both here and overseas, reflecting the global impact of “comply or explain” and its contribution to the UK’s role as an international financial centre. It will be debated tonight (6 November) at an event hosted jointly by the FRC and the London Stock Exchange.
FRC Chairman Baroness Hogg said: “The Corporate Governance Code, with which UK listed companies “comply or explain”, has come a long way in 20 years. It’s a good moment to take stock; and this collection of short essays does exactly that.
It brings together the views of a wide range of people – directors, investors, academics, lawyers and the media – from different markets. From their diverse perspectives, some common themes emerge. One is that the pioneering work of Sir Adrian Cadbury has resonated around the world. Codes have been introduced in countries as different as Switzerland and Bangladesh. Even in the US, where the company law framework makes “comply or explain” codes more of a challenge, there is starting to be discussion about how one could be made to work.
In continental Europe, meanwhile, there remains some uncertainty about the right balance between a code-based best practice approach and formal regulation. But even here, a theme emerges of general recognition that the UK approach has brought benefits. This is not to say “job done”. Many contributors still see the Code as a work in progress, with much more left to achieve.
Our own assessment is that, for all these reservations, the Code has made a big difference to our corporate culture, and continues to do so. Companies, on the whole, want to comply with agreed best practice, even when their initial instinct may be against change. Take, for example, the widespread take-up of the provision calling for annual election of directors, which we introduced a couple of years ago.
In 1992 it was still common for companies to combine the role of Chairman and Chief Executive. That is now highly unusual. Often the Code has moved practice faster than law could ever have done. For example, the UK introduced audit committees long before the European Union got round to its statutory directive. Moreover, the UK committees operated to a higher standard of independence than the European law was able to require.
In some areas the Code has driven innovation – for example, in the development of board evaluation. This is not an area where regulators can wave a magic wand, and create expertise out of nothing. The Code is flexible, and can use aspirational language to drive change, as our new encouragement to diversity in the boardroom shows.
Codes cannot replace all regulation. But they can reduce the need for it, especially where the objective is cultural and behavioural change over time. So we are glad that, after debating the issue for a couple of years, the European Union seems set to reaffirm its acknowledgement of the role played by codes. But this debate has put the onus on us to demonstrate real action rather than box-ticking. This is why we have been focused on improving the quality of explanations and why the FRC, through its annual report on developments in corporate governance, is monitoring more closely what is actually being achieved.
The prize is a healthy capital market, in which companies are responsive to the needs of the shareholders who provide their capital and hold it for the longer term. This not only makes them better companies, but also better placed to raise new capital when they need it. The purpose of good governance is to manage risk and channel entrepreneurship, equipping companies to survive and grow.”