Corporate Governance Could Throttle Enterprise
Byline: Peter Wilson-Smith, Editor- in-chief
Periods of corporate and financial excess are always followed by waves of recriminations, new laws and regulations. But is the corporate governance backlash now running out of control?Jonathan Charkham, one of the fathers of modern-day corporate governance and a former adviser to the Governor of the Bank of England, believes we are heading in that direction. We are in danger, he says, of becoming too prescriptive and this could throttle invention and ingenuity.
The danger signals that concern Charkham are all too evident. In the US the backlash against fraud and excess in the corporate world has led to the Sarbanes-Oxley Act. Parts of the act are fine, but it includes some ludicrous provisions such as penalties of up to 20 years in prison for chief executives who sign off on incorrect accounts. Does it really make sense to hand out stiffer penalties for this than murder?
In the UK, the boardroom problems during the boom were generally the result of incompetence rather than fraud, Marconi being the classic example. But the UK government felt something needed to be seen to be done in the UK in wake of Enron et al, so the government commissioned Derek Higgs, the former investment banker, to come up with proposals to strengthen the role of non-executive directors.
Much of what Higgs proposed was sensible but some of it was misguided and the furious debate provoked by some of the more controversial aspects has tended to obscure the bigger issue - will Higgs really lead to more competence in the boardroom and better-run companies?
Charkham reckons that individually some of the Higgs proposals are okay but the danger comes when you try to prescribe recipes and structures in too much detail. The problem is it delivers a weapon into the hands of bureaucrats and regulators and lots of detailed rules don't necessarily make for effective boards anyway. "You can go through all these hoops but if the board dynamics are wrong, it doesn't work well," says Charkham.
As a member of the Cadbury Committee, whose report provided the foundation of the Combined Code on Corporate Governance, Charkham knows what he is talking about and he's had first-hand experience of real-life corporate governance issues. He has run a private family company that made mattresses, sat on the board of big companies such as GUS and he's now a director of Mizuho International and an adviser to Board Performance. …