Corporate Governance by Robert Tricker
Robert Tricker, noted in his book Corporate Governance that British companies gave scant attention to governance. Media outlets such as The Observer, the Guardian and the Economist did not use the term “corporate governance” until 1991, 1989, and 1990 respectively. Moreover, the topic of corporate governance was primarily ignored by the Financial Times in the 1980s despite being a significant media outlet offering thorough coverage of international and British business. In May 1978, the term was first featured in an article on the “growing prominence of outside directors in U.S public companies” (Cheffins, p.7, 2015). Then in the 1980s and 1990, “corporate governance” was mentioned 18 times and over 40 times, respectively. It has been argued that “sizeable family block holders” in Britain were prevalent until the mid-1980s. The nature of control and ownership within a given country is very significant in shaping the governance issues at stake, conceivably the debates on corporate governance in the United States (U.S) during the 1970s “were not directly relevant to Britain” (Cheffins, p.9, 2015). Differing patterns of control account and ownership of corporate governance lead to the late popularity of the idea in Britain.
Furthermore, the nature discourse regarding large companies’ board structure is essential in explaining the reason for late arrival of corporate governance to Britain’s plan in the 1970s as it did in the U.S. At the start of 1970s, the corporate governance’s concept received a lot of interest and poised to take off in America. However, issues related to management led to a high-level debate in the United Kingdom (U.K) without giving corporate governance explicit reference. Sir Brandon R. Williams introduced private member bills in multiple parliament sessions. The statements, if enacted, the board of the large public companies would have a minimum of three nonexecutive directors. Sir Brandon measures did not have any chance of becoming law, but during that time, the conservative government was not entirely unsympathetic. However, it played a significant role in showing that the best way forward was to have consideration of matters in proper context by a committee.
It indicated that the way forward was to have matters considered in proper context by a committee the Confederation of British Industry (CBI) established in 1972 to investigate means for improving the accountability of management.63 The Watkinson Committee (Cadbury Schweppes chairman Lord Watkinson chaired the committee) reported in 1973, with the centrepiece of its report being a 12 item non-binding Code of Corporate Conduct that acknowledged that more extensive public companies should have nonexecutive directors on the board charged with monitoring the executives.64 Government White Papers issued in 1973 and 1977 similarly accepted that nonexecutive directors could beneficially increase the element of independence and objectivity in the boardroom but refrained from recommending that their appointment be mandatory. 65
It might have been thought that with nonexecutives being a topic for debate in the U.K. in the 1970s the term “corporate governance” would have travelled across the Atlantic to Britain as a handy catchphrase. However, during this period, a topic peripheral to the initial surge of interest in corporate governance in the U.S. monopolized attention in Britain. This was an industrial democracy.66 A Christian Science Monitor columnist observed in 1977, “In many countries of Europe, but distinctly not the United States, workers are demanding, and getting, a larger voice in the decision-making process that makes their company run.”67 As the 1970s began, Britain was not one of those European countries. Employee involvement in corporate decision-making had barely registered as an issue in the U.K. as the 1970s got underway.68 However, in 1973 Labour leader Harold Wilson said: “We are at the beginning of a social revolution in this sphere.”69 Britain’s joining the European Union, then known as the European Economic Community (EEC), was a catalyst.
While corporate governance was rarely mentioned in Britain for nearly two decades after the initial surge in interest in the concept in the United States, matters changed dramatically as the 1990s began. In 1990, the year before the Cadbury Committee was established, press coverage of corporate governance started in earnest (Fig. 1) and theoretical commentary was starting to accumulate.95 Readers of 1990 articles on nonexecutive directors in the Financial Times were told that “Corporate governance is one of those themes of the 1990s that is growing in intensity”96 and that “There is ample evidence that investors are concerned about the state of corporate governance in the U.K.”97 John Redwood, the corporate affairs minister, said the same year he supported calls by institutional shareholders for “truly independent” nonexecutive director representation on boards and added that “Better corporate governance does require the remodelling of some boards of directors.”98
As the Committee’s chairman, Sir Adrian Cadbury, acknowledged in his forward to the Committee’s 1992 report, the Committee’s launch did not catch the headlines. Still, its proceedings would become the focus of unanticipated attention (Committee on the Financial Aspects of Corporate Governance, 1992: 9). One reason was that, soon after the Cadbury Committee was established, several prominent British public companies collapsed in circumstances which suggested that a lack of accountability on the part of top executives had contributed to the problems which had arisen. Also, Britain was in the midst of a recession that fostered concern about the country’s relative decline in terms of competitiveness, with managerial shortcomings left unaddressed by inattentive boards reputedly causing Britain’s economic standing to suffer (Cheffins, 1997: 72)
In 1991, an investment manager was quoted in the Independent to the effect “governance…would become one of the fashionable words of the 1990s”.99 The Guardian similarly referred in 1992 to “the current craze for corporate governance issues.”100 The Financial Times likewise remarked upon “the public fascination with corporate governance”101 and the Observer suggested that “the matter of corporate governance will be the issue for public companies as we hurtle towards 2000.”
Why did corporate governance achieve prominence in Britain when it did at the start of the 1990s? The work of the Cadbury Committee stands out as the most obvious catalyst for the newfound interest in the topic. Cadbury’s impact indeed was substantial, as we will see now. The remainder of the paper will show, however, that due to various trends relating to publicly traded companies the concept of corporate governance likely was destined to rise to prominence in Britain in the early 1990s even in the absence of Cadbury.
The Cadbury Committee was launched in May 1991 by the London Stock Exchange, critical members of the accountancy profession and the Financial Reporting Council, an independent regulator backed by accountancy organizations and the U.K. government. 103 The Committee’s sponsors were concerned about an erosion of confidence in the standard of disclosure in published company accounts and in the ability of auditors to meet the expectations of users of corporate financial statements.104 The Committee also had the mandate to take into account broader organisational governance issues, including the responsibilities of executive and nonexecutive directors to review and report on corporate performance and foster communication between the board, shareholders and other stakeholders.105 Accordingly, institutional investors and the corporate sector, in the form of a council member of the CBI, were represented on the Committee.
The Cadbury Committee agreed quickly after its establishment that it would generate a code of best practice.107 By the time the Committee issued a report and draft code of corporate governance best practice in May 1992 it had settled on the idea that companies should publish a statement of compliance with its system as a continuing obligation of listing on the London Stock Exchange.108 In December of that year the Cadbury Committee issued the final version of its Code of Best Practice and an accompanying report which provided the rationale for the Committee’s recommendations.109 The Stock Exchange followed up shortly after that by introducing what became known as the “comply or explain” obligation in its listing rules. 110 Listed companies correspondingly became obliged either to adhere fully to the provisions in the Code of Best Practice or explain any non-compliance. 1
Critics argued that the Cadbury Code and the accompanying report offered guidance that was too vague and insufficiently ambitious and that improvement would be incremental because adherence to the guidelines was not required by law.112 Such pessimism proved to be mostly unwarranted.113 Nonexecutive directors had in the wake of the issuance of the Cadbury Code leverage they lacked previously and listed companies treated failing to adhere to the Code of Best Practice provisions as something to be avoided.114 In the foreword to a Cadbury Committee 1995 report on compliance with the Code, Sir Adrian Cadbury characterized the response as “heartening”. He said, “Real progress in raising governance standards is being made….”115 A committee chaired by Sir Ronald Hampel with a remit of reviewing the impact of the Cadbury Report and a 1995 report on executive pay by a committee chaired by Sir Richard Greenbury116 said in its 1998 statement of Cadbury that it was “generally accepted that implementation of the code’s provisions has led to higher standards of governance and greater awareness.
The work, the Cadbury Committee, did was influential internationally as well as domestically. While most countries with well-developed equity markets now have in place a widely recognized code or set of corporate governance principles and such systems are often backed by a “comply or explain” regime, 118 the Cadbury Code was the pioneer and as such quickly captured attention elsewhere. The 1998 Hampel Report said that Cadbury “struck a chord in many overseas countries; it has provided a yardstick against which standards of corporate governance in other markets are being measured.” 119 A Swiss company law expert said the same year “it is hard to imagine today how any discussion of Corporate Governance could by-pass the Cadbury Report and the corresponding Code of Best Practice.” 120 The Cadbury Code thus qualified as the 1990s drew to a close as “the world leader” with respect to corporate governance issues.121 Sir Adrian Cadbury himself “rapidly became the public face of corporate governance around the world, travelling widely to address conferences and spending time giving interviews to journalists from publications ranging from local newspapers to read practitioner journals widely.
Why was the Cadbury Committee so influential? Over the long haul, the novelty and effectiveness of its Code of Best Practice were pivotal. As we have just seen, dealing with corporate governance by way of a code backed by “comply or explain” not only was innovative but had a more significant impact on public company behaviour than many anticipated. In the short-term, events occurring concurrently with the Cadbury Committee’s establishment and deliberations put Cadbury – and corporate governance — in the spotlight to an unanticipated degree.
The launching of the Cadbury Committee did not in and of itself have a galvanizing effect. A newspaper columnist identified the name of the committee as a significant obstacle, saying of those in charge of naming the Committee on the Financial Aspects of Corporate Governance “You could not have chosen better if you wanted to kill your report stone.”123 Sir Adrian Cadbury indeed was wrong-footed by the attention the Committee would subsequently garner, saying in September 1992 of himself and the other Committee members “When we were set up, we didn’t expect to be the centre of all of this attention.
A recession the U.K. was experiencing was one event occurring just before and during the Cadbury Committee’s deliberations that drew attention to its work. As Cadbury himself noted before the issuance of the December 1992 final report challenging economic conditions affecting Britain had been exposing managerial weaknesses the buoyant economy of the late 1980s had masked. 125 The fact that executive pay was rising substantially as profits fell due to the economic downturn reinforced the idea that not enough was being done to hold top executives to account in leading U.K. companies.
A wave of corporate scandals occurring contemporaneously with the Cadbury Committee’s formation and operation was an even more critical reason Cadbury received unanticipated attention. The Cadbury Report implicitly acknowledged the point in its final report, saying “Had a Code such as ours been in existence in the past, we believe that a number of the recent examples of unexpected company failures and cases of fraud would have received attention earlier.”127 The 1990 collapse of the Polly Peck International plc food and consumer electronics group helped to set the scene.128 Some shareholders sought shortly before Polly Peck’s downfall to strengthen the company’s board so it would be situated appropriately to deal with Asil Nadir, the company’s high-profile chairman, CEO and dominant shareholder.129 These efforts failed and in October 1990 administrators were called in as shares worth £2 billion three months earlier had become worthless and Nadir stood accused of having perpetrated what to that point was “the biggest fraud in English economic history.
The following year — the year the Cadbury Committee was launched — was in the British business world an “unprecedented year for scandal.” 131 In February 1991 criminal charges were filed against Nadir, who ultimately fled Britain after being charged with stealing over £100m from his company.132 In July, global banking authorities, led by the Bank of England, shut down the Abu Dhabi dominated Bank of Credit and Commerce International (BCCI) amidst revelations of minimal boardroom oversight of a banking business characterized by rampant corruption, deceit and fraud.133 Most spectacularly, when press baron Robert Maxwell died suddenly in November a business empire orientated around two public companies, Maxwell Communications Corporation and Mirror Group Newspapers plc, collapsed as improper diversion of pension funds and an illegal share price support scheme came to light. 134 Maxwell was subsequently described as “the greatest and greasiest crook in financial history.”135 The nonexecutive directors of Maxwell Communications and Mirror Group Newspapers, which included some prominent former politicians, conferred respectability on the Maxwell business empire but seemingly did nothing to deter the wrongdoing.
A Guardian columnist commenting on the release of the Cadbury Committee’s final report in 1992 suggested: “Mega scandals like BCCI and Maxwell…have rightly propelled the issue of corporate governance to the top of the City’s agenda” (“the City” is shorthand for London’s financial district). 137 The Maxwell debacle was probably the most crucial. It provided the Cadbury Committee, established a few months beforehand, with a strong justification for focusing strictly on board responsibility and composition,138 topics more in the corporate governance mainstream than auditing and accounting. The scandal also meant the Cadbury Committee’s findings captured attention in a manner that would not have occurred otherwise. As the Guardian said of the Committee “(i), t is reporting at a time when public consciousness of wrongdoing in the boardroom is particularly high after the Maxwell affair.
Based on the foregoing it might be assumed that the Cadbury Committee’s work, fortified by the recession, executive pay patterns and corporate scandals, was responsible for bringing the concept of corporate governance to prominence in the U.K. There can be no doubt that the Cadbury enterprise was a pivotal chapter in the history of corporate governance in Britain. There were, however, broader forces at work that meant corporate governance would have in all likelihood have risen to prominence without Cadbury. In 1995 Gina Cole, then secretary to the Cadbury Committee cited the publication of Codes of Conduct by the National Health Service and debates in Canada and Australia concerning the adoption of “comply or explain” corporate governance arrangements as evidence “of the strong influence of the committee’s work.”140 She qualified her verdict, however, observing “One cannot say that if the Cadbury Committee had not existed that these developments, and others overseas, would not have occurred.”141 The remainder of the paper will argue that the situation was much the same for corporate governance and U.K. public companies. The Cadbury Committee’s legacy was substantial. After all, the U.K. Corporate Governance Code, the successor document to the Cadbury Code of Best Practice – albeit much enlarged142 – is currently the departure point for understanding corporate governance in Britain.
Nevertheless, there was more going on with the rise of corporate governance in the U.K. than Cadbury. Trends that likely would have ensured that corporate governance would have become topical in Britain in the early 1990s without Cadbury will be identified in the remainder of the paper. Focusing on developments in the United States provides necessary context.