Academic journal article National Institute Economic Review

Corporate Governance

Academic journal article National Institute Economic Review

Corporate Governance

Article excerpt


The issue has existed for as long as there have been social institutions; yet two decades ago, the term 'corporate governance' had not been coined. The matters involved were of concern only as an esoteric branch of commercial law. Today, the subject is a central political and economic issue in Britain and the United States.

There are several reasons. One is corporate fraud and corporate collapse on a previously unimagined scale. Economic history records many instances of the collision of greed and naivete - the South Sea Bubble was only the most memorable of many ill-fated trading ventures. The Companies Acts of 1844 and 1856 established the limited liability corporation, and many contemporary commentators expected an explosion of fraud and irresponsibility. They were wrong. There were inevitable scandals and crashes, but the majority of corporations - which still controlled only a modest proportion of economic activity - were run with prudence and integrity.

The record of recent decades - in which the corporation has come to dominate business - has been a more chequered one.(1) Names as famous and as unquestioned as Rolls Royce and Barings have collapsed. Robert Maxwell, declared by DTI inspectors to be unfit to act as director of a public company, allegedly went on to plunder the assets of several more. Polly Peck, a FT-SE 100 company founded on little more than hot air, collapsed amongst allegations of false accounting and vanished assets. The grandly named Bank of Credit and Commerce International turned out to be a web of fraud and deception. In the last recession a number of sound operating businesses were damaged or destroyed by inappropriate financial structures assembled around them in the speculative excesses of the 1980s.

These events have dictated a public policy agenda, and a variety of reforms. In the last decade, we have had a new Insolvency Act, a Cadbury Code on corporate governance, and a Greenbury Code on executive remuneration. What should be the rules for corporate bankruptcy and liquidation? How should directors of public companies be selected, reappointed, and disqualified? What should they be paid? Who should define accounting standards? Or the relationship between investors and company management? What are the responsibilities of auditors? These questions have gained attention far outside the narrow circle of professionals who once debated them.

But the issue that has made corporate governance a subject for tabloid headlines is greedy bosses. The salaries of senior managers have risen far faster than earnings generally (Conyon, Gregg and Machin, 1995). Their pay has been enhanced by share option packages, which allow senior executives to buy shares in the company at a future date for a figure around the current price. Over a decade in which share prices generally rose substantially, share options proved very valuable. The result is that many salaried managers have become personally very rich in a way which was simply unknown in earlier decades. While security of employment for most workers has been reduced, service contracts for senior managers ensure that even the unsuccessful leave with generous payoffs.

Privatised utilities are the subject of particular attention, since it is obvious that only a short time ago the same jobs were done, often by the same people, for relatively modest salaries. Since many utilities were sold at low prices, share options often proved particularly lucrative. No British companies have yet matched the excesses of some American corporations: the chief executive of RJR Nabisco notoriously used a corporate jet to fetch his dog (Burrough and Helyar, 1990), and Steven Ross of Time-Warner managed to earn, or at least receive, the best part of $1 billion for his services to his company (Crystal, 1991). But even in Britain the only restraint on executive pay and perks appears to be the modesty of executives themselves, and that is a commodity in increasingly short supply. …

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