Corporate governance: Stand to reason

Cultural change works at different speeds. Sometimes it can take generations
to come through; at other times, it almost happens overnight. Change comes
fastest when there is a consensus, if unexpressed, that success is desired and
needed. This probably is the real legacy of the great corporate governance
revolution that has changed the landscape of British business over the past 15
years or so. From the Cadbury report in 1992, through the Smith and Higgs
reviews in 2003, changes that seemed earth-shattering at the time and that
raised a considerable head of opposition are now seen as comfortable parts of
the corporate landscape. The man behind that last review, Sir Derek Higgs, who
passed away in April, made a contribution worth a review in itself.

Sir Derek was one of those people who did decent things in a way that
commanded respect. He was a man of extraordinary abilities who, because he
appeared so ordinary in his approach, managed to reach people by moving almost
under their radar, and achieve far more than many realised at the time. This was
why he was the right man to produce a review of the role and effectiveness of
non-executive directors in the sometimes fevered post-Enron environment.

By putting forward a framework reliant on the reasonableness of people, he
created something which would withstand any furious opposition or efforts to
create greater confusion – this was in the early days of Sarbanes-Oxley, after
all. The UK could have easily slipped down the path towards astonishing
corporate bureaucracy, but the Higgs route took us to a world where processes
and safeguards made sense. And it took us down a route that reinforced the idea
that principles are better than rules.

Take the recent shouting match over the role of chairman and chief executive
at Marks & Spencer. What is happening goes against the ideas championed by
the Higgs report. But because that report also strengthened the idea of ‘comply
or explain’ it has been possible for both sides to achieve what they wanted. M
&S has a combined chairman and chief executive and the investment community
has put its views across very clearly. The results will unravel over the next
year. But the company will find the going difficult. It has backed itself into a
position which, though satisfying internal politics, can only end in tears or,
at best, in results which are very uncomfortable. Every slightest slip will be
magnified. The investment community has the upper hand, but M&S is weakened.

Higgs’s point was that businesses need differentiation between the leadership
of the board and the running of the business. Everyone knows this to be right
and proper. It was the strength of the Higgs review simply to turn common sense
into guiding principle.

But there was more to Higgs’s review than simply keeping those principles in
place. It also created an atmosphere in which businesses could, well, get on
with their business. Higgs was a man who wanted nonsense gone. He was one of
those people with a knack for spotting essential truths amid much confusion. He
had a way of putting his finger on the issue that teased out common sense. This
was why he occasionally, in the process of producing his report, had problems
with politicians. He would go for sense, while politicians, for their own
peculiarly convoluted reasons, would go for nonsense. For Higgs this was
ridiculous. But for the politicians, who were playing their own games, it
wasn’t. Ultimately, when it finally appeared after much consultation and
behind-the-scenes manoeuvring, the Higgs report was clarity personified. And
corporate reporting has since followed that lead.

Sir Derek’s review made this succinct in his opening letter, presenting his
report to the Chancellor of the Exchequer. The existing combined code and its
principle of comply or explain, he said, “offers flexibility and intelligent
discretion and allows for the valid exception to the sound rule. The brittleness
and rigidity of legislation cannot dictate the behaviour, or foster the trust I
believe is fundamental to the effective unitary board and to superior corporate
performance.”

Higgs had a huge advantage over his opponents in the corporate world because
he knew where the real drivers of change lay. “This is not about science,” he
said. “It is about people.” And that is why change followed. In the introduction
to his report, it says: “Corporate governance provides an architecture of
accountability – the structures and processes to ensure companies are managed in
the interests of their owners.” And then he immediately follows that with: “But
architecture in itself does not deliver good outcomes. The review, therefore,
also focuses on the conditions and behaviours necessary for non-executive
director to be fully effective.”

This is why Higgs’s work has had such a lasting effect. He dealt with human
beings, not theories. As he said in answer to a question at the press conference
that launched the review: “We are dealing with grown-up intelligent people who
know what bad practice is.” And, by and large, good practice has driven out bad
many times since.