Has the response to the Higgs Report on corporate governance upset the delicate balance between functional executives and non-execs on British corporate boards? Exec investigates.
By Ruari McCallion
At the time of writing this article, Northern Rock was stuck somewhere between the devil and the deep blue sea – nationalisation or sale to another private company, at a price far lower than the peak of early 2007. The owners of the company – the shareholders – have seen the value of their holdings plummet by over 90 per cent as the company’s strategy of borrow short and lend long fell victim to the US sub-prime mortgage fallout.
“You only have to look at Northern Rock as the obvious recent example – what on earth were the non-executive directors doing?” said Donald Stewart, partner with international corporate law firm, Faegre & Benson. We were discussing corporate governance – in particular, the role of non-executive directors. Since the Higgs Report in 2001/2, the make-up of corporate boards has changed significantly, with a greater number of non-executive directors now included.
Corporate governance and company ownership has been a vexed subject for a very long time. Most people will think of Robert Maxwell but concerns go back a lot further. Adam Smith declared in The Wealth of Nations that managers (for which read, directors) could not be trusted to look after other people’s money; that ‘negligence and profusion’ were the inevitable result of businesses becoming incorporated. He said that in 1776, at which time shareholder-owned companies had been banned from the UK since 1720, after the South Sea Bubble. Exchange Alley, in the City, was the hang-out of con-men pushing stock they praised to the skies – early-style PR, perhaps? Shareholding was viewed as a way of parting fools from their money, which quickly found its way into the pockets of the company managers, before the inevitable collapse.
Dilution of ownership
The connection between ownership of the company and its operations was one that deeply concerned Adam Smith and, coming up to date, it’s identified as an important factor in economic activity and growth by Martin Carree, André van Stel, Roy Thurik and Sander Wennekers of Cranfield University School of Management. In their paper, The Relationship Between Economic Development and Business Ownership Revisited, the authors establish that a high rate of economic growth tends to go hand-in-hand with high rates of individual business ownership – self-employment or small business activity. True, such activity is also associated with high or rising unemployment, but there are some very interesting equations that explain it all and they can be accessed here. Read and be enlightened.
But today’s global economy is based upon large businesses interacting with each other and they can’t all be family-owned. The problem for society – and the companies themselves, long term – is how to control them, and the dilution of ownership in the shareholder form tends to work against effective control. The Higgs Report, and the Cadbury Report…
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