Experienced lawyer and governance expert reflects on developments in corporate governance over the past 30 years.
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Reflecting on thirty years of corporate governance
I developed my expertise in corporate governance really through luck and timing. The first transaction I was involved with was the flotation of Mirror Group newspaper and resulting Maxwell affair – which is the birthplace of modern corporate governance in the UK. If I’d qualified a few years earlier or later, things may have been very different.
The corporate governance framework at end of 80s and in the early 90s was about directors acting in best interests of the companies. Then came several cases where a ‘cult of the individual’ arose around a CEO. Some amazing things were done with the entrepreneurial freedom that allowed, but some terrible things also. Several reports and initiatives followed over the next 20 years responding to these corporate failures and making new recommendations.
I can’t do justice to every initiative in the time allowed, but the direction of travel was that the ‘good’ arising from that corporate freedom was outweighed by the ‘bad’ and more controls were needed. The development of the role of the non-executive director has been particularly positive.
However, in my view, not enough effort was spent in these various reports in standing back and looking holistically at what had been done and how we compare internationally. It’s often said that the UK has the best corporate standards in the world. I see this as a reflection of the scale of the compliance burden, rather than an assessment of whether that burden produce the best outcomes.
In the last five years, there’s been a significant change in the way corporate purpose has been pursued. To me, it is an inflection point departing from the notion of business as purely the pursuit of profit. We have ushered in concepts like long-term sustainability of the business, plus environmental and social impact.
With this has come the notion that corporate governance is good for all companies, not just publicly listed companies where it was developed. The legislation on governance standards applies irrespective of whether a company is listed or not.
“There is a belief among the investor community on the value of governance standards and non-executive directorships for all businesses.”
The shift in how company purpose is viewed has materialised in the form of ESG. The Larry Fink letters have been hugely influential in this regard, where BlackRock – the largest institutional investor – made clear it wants all their investees to have a clear ESG strategy. That wasn’t the same as saying that for-profit business has an altruistic obligation. Fink has clarified his position that he sees this as part of his fiduciary duty to his investors to produce a return on capital. Ultimately we’ve evolved to a place where companies should do ‘good’ as they will end up being more profitable if they do.
At an individual company level, we do need to be mindful that, although business needs to have regard to general ESG trends, each business has its own unique fingerprint. We find that in stakeholder dialogue, specific businesses may not need to adhere to theoretical standards. For example, companies building on challenging substrates, like in deserts or reclaimed land in Hong Kong harbour for example, require significant quantities of cement and steel. This may not meet environmental standards yet alternative materials are not of the same quality. Investors therefore want to see a transition plan, but understand that will not be measured in years but across decades.
We also see a greater understanding that diversity and inclusion are distinct from each other. Diversity you can measure with a snapshot of how many in a business are a particular gender, or ethnicity or sexuality or any other objective criteria. Inclusion is more about the way those components of human capital and culture operate together -it’s a dynamic thing. Diversity without inclusion is not enough – you have to have both.
I’m excited that DLA Piper is engaged in a two-year research study with Cambridge University into the future of governance. It is quite an undertaking and we can’t presuppose the outcomes. That said, two topics we may expect to see addressed are greenwashing and workplace activism.
Within the increased litigation we have seen around green washing, there clearly have been cases where companies have sought to mislead. But there have also been instances where there has been no malevolent intent, but an enthusiasm to communicate plans and litigants seeking to exploit the gap between that and current reality.
I see workplace activism, where employees come together to make clear their expectations about how management operates, as a force for good. Management may well benefit from listening to the views of their carefully recruited talent, in the right way.
A final word on board composition…
From memory, the Mirror Group newspaper’s board at end of 80s was at around 20 people. That is bloated and uncomfortable, though individual directors find safety in numbers.
A smaller board requires that the intensity of directors’ work is high and dedication and commitment is a prerequisite for all potential directors. It should not be easy to obtain a seat on a good board.
There should also be a recognition that the ideal board for a company today may not be ideal for the company in five years’ time. Continuing with the ESG example, the board requirements for a company that needs to make system-wide change to adapt to the ESG agenda, will be very different to that for a company which has already made those changes and whose ESG strategy is now business-as-usual. No director should expect a job for life on any board.
Ultimately, recruitment to the board requires careful consideration. You need to make sure that the board you’re designing is a bespoke garment, not off the peg.