The MT Diary: Howard Davies

'Code fatigue' stalks Britain's boardrooms, yet the governance issue rages on in the US

by Howard Davies, the director of the London School of Economics
Last Updated: 31 Aug 2010

The words 'corporate governance' in the first sentence of an article are guaranteed to put off a large percentage of the potential readership. After Higgs and Smith, there is certainly an acute case of code fatigue in many British boardrooms.

The key battles - over the place of independent directors, the role of audit committees and separation of the posts of chairman and CEO - were won and lost some time ago. So there is a sense that the new codesmiths are touring the battlefield, bayoneting the wounded.

The focus has now switched to the more interesting question of just who is personally suitable for the newly defined roles. Ian Prosser, who withdrew after being named as chairman of J Sainsbury, is the latest to discover that shareholders will not simply nod through traditional names in future.

But on the other side of the Atlantic, the debate on board structure is warming up nicely, stimulated in part by John Reed's decision to split the chairman and chief executive roles at the New York Stock Exchange. He hasn't found a new part-time chairman yet, but that is the declared intention. After the Dick Grasso affair (which is by no means over), it seems odd to say so, but the NYSE has traditionally been seen as a leader in corporate governance practices.

Other influential voices can be heard advocating a split, roughly on the British model: Paul Volcker, for example, the former chairman of the Federal Reserve, and Richard Breeden, the former SEC chairman, whose battles with Conrad Black on behalf of the Hollinger board have provided vivid evidence of the dangers for shareholders in an over-dominant chairman.

However, many others still see virtues in the combined role. Arthur Levitt, who ran the SEC for seven years under Bill Clinton and whose trenchant views on accountants and auditors have been proved right many times over since he left, remains a solid upholder of the traditional US model. So the supporters are not just those who have something to lose.

Over here, it has been so non-PC to advocate a combined role for so long that we can scarcely remember the arguments. But Americans maintain that one leader can provide firmer strategic direction and that a split at the top creates risk. You are betting the company on the personal relationship between two individuals. If things go wrong, a chairman can either muck in with the CEO or call the headhunters.

Most choose route two, which may not aid long-term goals.

There are at least three, quite distinct, corporate governance models in operation in developed countries - the US, the UK and the so-called Rhineland two-tier board structure. Judging by the record, it is not obvious that one system is unambiguously superior to the others. Indeed, one global fund manager, which has recently decided that it should now vote on corporate governance resolutions, systematically votes for combined chairmen/CEOs in the US, for split roles in Britain, and for supervisory boards in Germany. They are comfort- ably in line with best practice in each case.

Just about the only corporate gover-nance model that has no supporters anywhere in the globe is the one in place at the BBC - which the Government appears determined to maintain, even though the departures of Gavyn Davies and Greg Dyke give it an ideal opportunity to make a new start.

The BBC has a four-days-a-week chairman, paid less than 20% of the director general's salary. It's impossible to find anything similar in the private sector. Then there is a board constructed very largely on a representative basis, which has to provide strategic leadership and support for management on the one hand, and must act as a regulator in the public interest on the other.

It's not surprising that, when the chips are down, the BBC's governors find it hard to fulfil either role effectively.

The Government seems to be awaiting the Charter review before making a change. That must surely be a mistake. It must be possible to make practical changes, by agreement, ahead of the legislation.

A frequent complaint from companies faced with regulatory requirements in Britain that have been stimulated by failings elsewhere is: it ain't broke, so why fix it? One has some sympathy. But at the BBC, it ain't just broke, it's in smithereens. Someone has to fix it.

One man who would have been a rather stronger candidate for the BBC, Peter Burt, has gone to ITV. It's lucky to get him. Burt is the man who made the Royal Bank of Scotland what it is today.

Shurely shome mishtake, I hear you say, since Burt was at the other, common or garden, Bank of Scotland. Indeed he was, but it was his bold pursuit of NatWest that alerted RBS's George Matthewson to the opportunity that the sleepy giant represented. He lost out to Matthewson's superior firepower, but it was a good clean fight and Burt's strategic case was strong.

Then came the Halifax merger, which he supported but which eventually left him on the sidelines. He deserved better and has now, belatedly, been rewarded.

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