UK: bankers, criminals and corporate governance

A trio of letters appears in today's Times newspaper under the heading Bankers, criminals and corporate governance. The letters respond to an article published in yesterday's Times by the former Director of Public Prosecutions (Ken Macdonald QC) titled Give us laws that the City will respect and fear. One of the letters, written by Professor Bob Garratt from Cass Business School, states:

The UK is in a paradoxical position. We have an acknowledged world-class corporate governance system yet with no resources or political will to enforce it. The 2006 Companies Act has given us a firm basis to avert future problems through its clear focus on the director’s duties of skill, care, diligence and the avoidance of conflicts of interest.

The 2006 Combined Code on Corporate Governance is used as a model for private and public sector organisations internationally. Yet it is mandatory only to a tiny minority — listed companies in the UK — and so misses most private businesses and the rise of public sector businesses (eg, the growing number, currently 114, of NHS foundation trusts that will each often have annual budgets of half a billion pounds). What is lacking is a powerful regulator with enforcement capability for all businesses. It is currently assumed by many that this must be the job of the Financial Reporting Council. The FRC has six oversight boards within it. All of these focus on financial aspects. There is no corporate governance oversight board. If these are the FRC’s priorities, and as corporate governance goes well beyond the financial aspects of board competence, do we need a national corporate governance regulator now?

Several points can be made.  First, has the case for a "powerful regulator with enforcement capability for all businesses" been made? What lessons can we learn from the Financial Services Authority's performance as the single regulator for financial services? Second, would arguments in support of a national corporate governance regulator be made if the Financial Services Authority had more fully scrutinised bank governance? Third, how will the codified directors' duty to exercise reasonable skill, care and diligence provide a "firm basis to avert future problems"? This duty is not new. Fourth, the Combined Code on Corporate Governance is based firmly on market regulation and a clear role is envisaged for institutional investors. The Code reflects best practice. Changes in the manner of its enforcement would clearly require a review of the Code's structure and principles. A move away from best practice towards minimum standards of conduct may have undesirable consequences including an increase in 'box ticking' compliance. Finally, contrary to what Professor Garratt suggests, a code of governance for NHS foundation trusts exists. It is based on the Combined Code and was published several years ago by Monitor (the independent regulator of NHS foundation trusts) - a copy is available here.