Across the pond

with David Anderson

David Anderson is President of the Anderson Governance Group

Powerful choices

Rules are seductive for the power

they imply.

oliticians and regulators have revisited

their approach to market regulation
in response to trouble in the capital
markets. Yet directors and executives,
at whom these reforms are aimed, complain
about being swamped with regulation.
British business leaders, like their Canadian
counterparts, would rather see sound principles,
allowing for discretion based on circumstance,
than rigid rules.
The EUs Green Paper (2011) on corporate
governance sets out the issues that market
participants and regulators will have to address
in order to restore confidence. Importantly,
it does so without giving answers, although
prescription seems likely.
Those jurisdictions given to a rules-based
approach will look for the rules to be tightened.
Jurisdictions favouring a principles-based
approach have a choice: stick with principles or
adopt a rules-based approach. The EU and the
UK are at such a juncture. The consequences for
decisions made now are hard to overestimate.

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In Canada, large public companies many

of which are listed in Toronto and New York
and so face two different regulatory regimes
are used to marching to two drums. Their
experience is that the rules-based drummer
bangs a louder drum and so behaviour aligns
to its beat.
Of course, significant market challenges
are present under both regimes, so neither is
clearly superior. However, rules are seductive
for the power they imply to control market
actors through explicit directives and sanctions.
In practice, no regime is without a significant
dose of rules; the differences are more of
degree than kind.
The debate over the direction regulation may
take must test three assumptions. These are: (1)
governance homogeneity: that the challenges
faced by companies under the purview of
regulation are substantially common, justifying
a common approach to common problems; (2)
market homogeneity: that those companies
affected by regulation are similar enough in

business circumstances to warrant a uniform

approach; and (3) regulatory efficacy: the rules
and their enforcement efficiently and effectively
direct, modify or preclude relevant behaviours.
Are governance challenges in the UK
similar to those across the EU? Ownership
structures are certainly different. Widely
dispersed ownership in the UK contrasts
with block holdings commanding corporate
control in the EU. Indeed, across the EU there
are many governance frameworks in which
the approaches taken to board structure, risk
appetite, director independence and whollyowned foreign subsidiaries all vary.
Can the application of an EU-wide
governance framework cover the necessary
range of corporate behaviours to meaningfully
affect outcomes of interest to regulators?
Decisions are behaviours with an ethical
dimension, and as such are hard to adjudicate
with fairness, particularly when rules are the
standard, and so discretion is minimised.
To be effective, a regulatory regime must
fit its context. A one-size-fits-all regime is only
appropriate when the conditions of governance
homogeneity, market homogeneity and
regulatory efficacy are met. In truth, looking at
the EU as a single jurisdiction, these tests are
not met. Even within the UK, corporate leaders
make decisions in the context of widely varying
governance and market characteristics.
In the context of these moderate degrees of
diversity, a principles-based regime has the twin
benefits of being suitable in a wider range of
circumstances and of permitting a wide range
of corporate solutions.
The consequences of the systemic risk
taken by the financial services sector to some
degree justifies a proscriptive approach to
regulation. Yet the articulation of principles
in practice is also vital. Our long-term interests
are best served when business leaders are
permitted to exercise judgement. Without
the latitude to affect choice, there can be
no responsibility. Tightening rules too much
inhibits accountability. The further we walk
away from this truth, the less rich and vibrant
our future will be.

About the author

David Anderson MBA PhD ICD.D is the
President of the Anderson Governance
Group based in Toronto. He can be
reached at david.anderson@taggra.com
and +1 (416) 815 1212.