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Strategies and Balance
in our experience working with companies’ governance
structures and philosophies differ, sometimes
radically, from company to company.
There are differences of ownership structure, and
there are companies that have different attitudes
towards whether they should focus on working
with existing shareholders or look for a broader
stakeholder mix. You have one- versus two-tier
boards, and there is also that big debate, particularly
in the United States, about whether the
Chair should or should not be combined with the
chief executive role.
In our experience, these are legitimate differences.
Governance structures can be done well
in some companies and poorly in others. I think
it is difficult to hold to the belief that there is
only one way of doing corporate governance,
because you may end up with the tail wagging
the dog. You have to be wary of a rule-driven
system. Box-ticking, as I said earlier, can be
gamed and can lead to false positives and false
negatives. For those of us that try to analyse
companies from an investment perspective, obviously
we need to know the extent to which companies
comply, but I think if companies explain
why they don’t, we need to be listening with very
open ears and possibly be willing to accept to the
explanation.
This ultimately speaks to the point that there
is room for both rules and principles, but at the
end of the day you need to focus on a principlebased
system, as principles will ultimately trump
rules. The principles that I offer are the ones we
use in the S&P criteria, which we borrowed from
the OECD corporate governance guidelines: companies
should be driven by fairness, transparency,
accountability, and responsibility. The point
is, if you are looking at disparate structures, you
need to put these principles as the lens in front
of your eyes, so that you can interpret different
structures through these principles. One would
hope that these principles, even though we may
differ about specific nuances of corporate governance,
would be relatively consistently valued
from culture to culture around the world.
To bring this home, then: the conclusion that
I would like to leave with you is that corporate
governance is a risk factor. There is a linkage of
governance risk to the concerns of investors and
D&O insurers, and there is the need to try to
understand these qualitative and difficult-tounderstand
issues more systematically and
objectively. Laws and codes can provide a positive
discipline, but there is more to it than simply
that. Equally, and linked to this mission, is that
governance is not a one-size-fits-all concept. You
need to assess companies on a case-by-case basis
and I would argue that the best way to do it is
not just to tick boxes, but to try to do this interactively,
to connect to and provide the best exposure
to culture (again, principles prevailing over
rules). Finally, governance is not an end unto
itself. The key is to keep in mind how it helps or
inhibits companies to oversee risks and build
sustainable competitive advantage; it is not a single
set of rules in isolation from each other. It
has to be linked to the enterprise as a whole, and
ultimately it is about trust – and trust is not
something that can be legislated.
How do you strike
David Jackson
the balance
Company
between prescriptive
and enabling strate-
Secretary, BP
gies I will discuss later
why this is such a timely
question. But first, why is
the question being asked
Let’s look at governance in the UK environment
and then broaden it out into Europe.
At the time I was asked to make a small contribution
to the discussion today, a survey
appeared on my desk co-sponsored by Allen &
Overy and MORI, with the headline: “Many
European senior executives are still fearful of an
Enron-like meltdown”. Only half of European
executives believe corporate governance reforms
have brought about a positive change in behaviour.
The costs of compliance have substantially
increased.” The numbers in the survey don’t
quite reflect the headline, but there is an interesting
line in the report, saying that what is significant
about this response is, despite the significant
increase in regulation, there is still work to
be done to convince executives that regulation
has achieved what it is meant to achieve, i.e. a
significant reduction in the likelihood of corporate
fraud.
In the worst of all worlds, regulation merely
achieves an increase in the cost of compliance
and becomes a distraction for senior management.
According to the results of the survey, the
jury is still out on the effectiveness of corporate
governance reforms; unless or until the majority
of those at a senior level who have to implement
these reforms, buy into them, there is only so
much that can be achieved.
One of the other issues raised in the survey is
the amount of time the spent on corporate governance
issues. Apparently “shareholders must ask
themselves whether the 25% of the time spent by
their directors on corporate governance issues is
too much or not enough.” The right answer will
depend on each company. It will be different for
a CEO or non-executive. The wider issue is
whether we are creating a corporate culture of
compliance and box-ticking which distracts
boards from the task of moving the business forward.
I would characterize this as the grumpy
business approach to governance: governance
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