PRACTISE-BASED PAPERS 7

The Corporate Governance Agenda

Sir Adrian Cadbury*

The name of Sir Adrian Cadbury has become synonymous with the development of corporate
governance. His original involvement was chairing the UK Committee on the Financial
Aspects of Corporate Governance in 1991, whose report has taken the name of Cadbury into
the annals of the subject. Since then Sir Adrian has visited 28 countries, contributing
massively to the raising of board level standards around the world. Now he reports that
he has enjoyed this governance odyssey, but is ``retiring from this particular field''. His
contributions as a member of the Editorial Advisory Board of this journal have been very
significant. Here he draws some conclusions on the state of corporate governance and likely
developments in the future.

Background PRO NED's tasks were to persuade com-

panies of the advantages of having compe-

I n May 1991, I was asked to chair the

Committee on the Financial Aspects of
Corporate Governance.1 It was set up by the
Financial Reporting Council, which in Britain
is responsible for accounting standards, the
London Stock Exchange and the accounting
profession. The Committee's sponsors were
concerned that the failure of some prominent
companies, the extent of whose problems
were not revealed by their published ac-
counts, could affect confidence in London as
a financial centre. Although our terms of
reference focused on financial reporting and
accountability, the subsequent collapse of
the BCCI Bank, the Maxwell affair and the
growing controversy over directors' pay put
governance issues on the public agenda for
the first time and effectively widened our
remit to cover corporate governance more
generally.
My previous experience in this field was
limited to chairing PRO NED2 from 1984
onwards and writing a book on the role of
a company chairman.3 The Bank of England
was the prime mover in establishing PRO
NED and it took the lead in the matter
because of its experience in helping to rescue
major companies in financial difficulties. The
Bank concluded that the prime cause of such
corporate disasters had been board failure.
tent, outside, non-executive directors on their
boards and to help them to find such people.
The Bank reasoned that it was better to tackle
the causes of failure than to have to pick up
the pieces afterwards. This put the need for
good outside directors on boards squarely on
the UK governance agenda.
Partly because our Committee's report was
among the earliest statements of corporate
governance practice and mainly because PRO
NED became part of Egon Zehnder, I received
invitations to discuss these issues in a number
of countries. I have to date visited 28 coun-
tries in the governance cause, some of them
more than once. Becoming a member of the
OECD Business Sector Advisory Group on
Corporate Governance added to this experi-
ence. I have always made it clear in inter-
national discussions that, in my view, there is
no single right corporate governance model
and that the best approach is to start from
whatever system is in place and to seek ways
of improving it. In this search for improve-
ment, every country can learn from the
experience of others.
I have enjoyed my governance odyssey and
* Address for correspondence:
learnt much about the state of governance Rising Sun House, Baker's
around the world. Now that I am retiring Lane, Knowle, Solihull, West
from this particular field, it seemed appro- Midlands B93 8PT, UK. Tel:
+44(0)1564 772931; Fax:
priate to attempt some kind of summary of +44(0)1564 771130

# Blackwell Publishers Ltd 2000. 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA. Volume 8 Number 1 January 2000
8 CORPORATE GOVERNANCE
the governance scene, as I have experienced
it. Where has the drive for change come from,
which governance issues are on the inter-
national agenda today and which may be
there tomorrow? Much of what has occurred
has been the outcome of shifts in the balance
of power between shareholders, boards and
executive managers, with intervention by
regulatory forces of one kind or another
thrown in. It is broad movements of this kind
which I find of special interest.
Board focus
Our Committee in the UK defined corporate
governance as ``the system by which companies
are directed and controlled''. Companies operate
within a framework which is set by the law,
by regulations, by shareholders in general
meeting in the case of shareholder-owned
companies and by public opinion. This frame-
work is never static and companies have
to be alert to changes in the terms on which
their communities expect them to carry on
their businesses ± the degree to which boards
now have to take environmental and social
effects into account is an example of how
rapidly those terms can change.
It is the board of directors which has to
determine where a company stands within that
framework. The board is the bridge between
the providers of capital and the executives
who put that capital to work, just as the board
is the link between the enterprise and the
community of which it is a part. It is the
directors who have to frame the purpose of
the company and agree the strategy by which
that purpose will be met. Equally, they have
to balance the demands of the various
interests which their company seeks to serve.
Corporate governance therefore focuses on
the role of the board.
The principles of corporate governance are
relevant to all forms of company, but atten-
tion has centred on publicly-traded corpor-
ations, because of their economic significance
and because more information is available on
them than on their private counterparts.
Internationally, the move towards privatis-
ation is in its turn adding to the market sector
and reducing the state sector. The state-
owned and private companies of today are
the public companies of tomorrow and they,
therefore, need to take note of governance
trends. The guidelines prepared for quoted
companies have even been applied to some
public sector bodies and not-for-profit organ-
isations. Such institutions are certainly in
need of governance guidelines, but they
should be tailored to their particular circum-
Volume 8 Number 1 January 2000
stances, rather than borrowed, not always
happily, from the corporate scene.
Performance and accountability are the
essential governance issues for boards of
directors. Performance is measured by re-
sults, by how consistently well a company is
run. Accountability is linked to performance,
because the more accountable a board the
greater should be the drive to perform. It
does, however, raise questions of to whom
and for what boards should be accountable.
Monks and Minow put accountability firmly
on the agenda when, memorably, they wrote,
``Corporations determine far more than any other
institution the air we breathe, the water we drink,
even where we live. Yet they are not accountable to
anyone.'' 4
In the 1950's and 1960's companies in
general in the developed world performed.
Corporate weaknesses were largely masked
by economic growth and corporate govern-
ance had no place in the business vocabulary.
It was doubts about the competitive ability
of Western companies to meet the Pacific
challenge, which caused investors to begin
to question board effectiveness. Then came
the collapse of Penn Central, the sixth largest
US corporation, which roused the SEC in the
US to state that ``the somnolent Penn Central
board . . . was typical of most giant corporations'
boards in the post-war period.'' 5
The market response
In terms of the balance of governance power
at that time, it was largely the executive
managers of businesses who were in the
driving seat. Investors could normally sell
their shares if they lost confidence in a
company, therefore boards could continue to
slumber. The market answer to slumbering
boards in the US, the UK and countries like
Australia was to encourage takeovers. Freeing
up the market in the control of assets looked
on the face of it to meet both the performance
and accountability tests. By definition, the
winning management team in a takeover
believed that they could earn a higher return
than the incumbents, thus performance
would be dealt with, and provided the bid
was financed by debt, the new team would
have to come to the market to finance plans
for expansion and would thereby become
more accountable.
In effect, the solution to inadequate govern-
ance was to leave it to the market. The
takeover remedy would not only improve
the performance and accountability of com-
panies subject to it, but would sound the
alarm for every board which could conceiv-
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PRACTISE-BASED PAPERS
ably be taken over. While this swung the
balance of power towards investors, take-
overs did not fulfil all the promise of their
advocates, partly because boards reacted by
putting defences against them in place and
also because the outcome was often no more
than a costly and disruptive way of bringing
about management change at the top.
All this activity in the corporate market
place put governance on the agenda for in-
vestors, boards and those in charge of financial
markets. Their response was to strengthen
market forces by encouraging the publication
of guidelines in order to clarify where the
responsibility for the performance and account-
ability of corporations should lie. The drive to
produce codes of good governance came from
different groups in different countries. In the
UK, it was the financial sector, in France and
India it was companies themselves, in Hong
Kong the accountants took the lead, in Spain
it was the government, in the Netherlands it
was the investment community, while in
most other countries it was an alliance of
business and financial organisations.
Understandably, countries with well-devel-
oped stock markets tended to be in the lead
in producing codes of good governance prac-
tice. Their stock exchanges were involved
both in formulating guidelines and in encour-
aging compliance with them through their
listing rules. The Peters Report6 on corporate
governance in the Netherlands includes as
an appendix a chart which compares stock
exchange capitalisation with GDP. The range
is striking; it runs from 124% for the UK, 94%
for the US, 72% for the Netherlands, 70% for
Australia & 64% for Canada to Spain 26%,
Germany 24% & 19% for Italy. It is those
continental European countries which are less
dependent on equity financing that have been
slowest to develop governance codes. Japan
does not fit this pattern; its stock exchange
capitalisation puts it among the leaders at 79%.
While it has yet to agree a set of governance
principles, the interim report of the Corporate
Governance Forum of Japan7 represents a
dramatic response to the call for corporations
to meet global governance standards.
While the codes around the world deal
with governance issues specific to their
country of origin, like nominee directors in
India, family shareholdings in Hong Kong,
powers of different classes of shareholder
in the Netherlands, the position of ``sig-
nificant'' shareholders in Canada and the
question of cross-shareholdings and director-
ships in France, there are common threads
that run through the great majority of the
governance codes published to date around
the world.
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9
Governance codes
The codes that have appeared so far have no
statutory backing, although the majority
require companies to state how far they
comply with them and to explain areas of
non-compliance. Compliance itself is left as a
matter between boards and their share-
holders. Equally, they are non-prescriptive,
respecting the differences between individual
companies and boards, which are often as
great within countries as between them.
Codes largely share two aims, both of which
are directed at raising standards of board
accountability and of board effectiveness. The
first aim is to strengthen the position of
investors and to encourage them to play their
part in the governance of the companies in
which they hold shares. There are inevit-
ably potential areas of conflict between the
interests of shareholders and those of the
executives running the business on their
behalf. The powers of the executive need
therefore to be balanced by increasing their
accountability to their shareholders.
The second aim is to strengthen the
influence of boards over the companies which
they direct. The codes encourage boards to set
out their responsibilities formally and to be
clear about their role in relation to the
management of their businesses. It was not
only that some boards were somnolent, others
were confused.
With those aims in mind, the two principles
on which every code rests are the need for
adequate disclosure and the need for appro-
priate checks and balances in the governance
structure, particularly at board level. Disclosure
is the lifeblood of governance. Governance
forces can only use their influence construc-
tively provided they have the relevant in-
formation to work on. All codes stress the
importance of transparency, of accurate and
timely reporting and of management openness.
Checks and balances cover such matters as
board composition, the proportion of outside
directors on unitary boards and whether the
posts of chairman and of chief executive
should be combined. The way these questions
are resolved varies country by country. In
France and the United States, for example,
there is a tradition of strong board leadership
with the two top posts combined. The
Australian Working Group,8 on the other
hand recommends, ``Except where special cir-
cumstances exist, the roles should be separate.''
History has its place in governance structures.
However, checks and balances should not
be seen solely as controls to prevent the abuse
of power. A positive reason, for example,
for recommending that the chief executive
Volume 8 Number 1 January 2000
10
should not also be the chairman is that the
effectiveness of boards turns to a great extent
on the skill of their chairmen and on their
capacity to give time to turning a group of
competent directors into an effective team. It
is hard for chief executives to give the
necessary time to acquire the skills of chair-
manship and to act as counsellor to indi-
vidual board members, in the face of the
demands of running the business.
Code recommendations
Turning now to the more detailed recommen-
dations of codes. They all stress the impor-
tance of clear board responsibilities. Boards
can only give their companies the leadership
they should, if they are agreed as to their role
and if the line between direction, which is
their task, and execution, which is the task of
management, is agreed and understood by
both. Unless that distinction is precise, it
will not be clear where the power of decision
lies nor who can be held accountable for
decisions. As the Australian Working Group8
recommends, ``The division of responsibilities,
terms of reference or delegations from the board to
management should be put in writing and
reviewed periodically.''
There is general agreement that boards
should include members who are ``indepen-
dent''. In the two-tier structure there is a clear
separation between the executive directors
on the management board and the outside
directors on the supervisory board. This does
not of itself resolve the matter. Supervisory
board members who are employees, or who
represent creditor or government interests,
are not in a position to take an entirely objec-
tive view of where the true long-term inter-
ests of the company lie. With unitary boards,
it is not simply a question of the balance
between executive and outside directors but
also of distinguishing between those outside
directors who can be classed as independent
an those who cannot. Disclosure has a part to
play: as the Belgian report9 says, ``Information
about the relevant interests of directors should be
disclosed in the directors' report.'' This is
intended to allow shareholders to make their
own judgements over how far outside direc-
tors might have conflicts of interest.
The simplest definition of who qualifies
as independent is in the UK code1: ``They
should be independent of management and free
from any business or other relationship which
could materially interfere with the exercise of their
independent judgement.'' An area of disagree-
ment about independence relates to share-
holding by directors. In the US & the UK,
Volume 8 Number 1 January 2000
CORPORATE GOVERNANCE
directors who hold shares are seen as thereby
aligning their interests with those of investors
in general. However, the Spanish code10
distinguishes between independent and ``pro-
prietary'' directors and suggests that boards
should hold a balance between the two. The
Canadian code11 follows much the same line
in advocating that board representation
should reflect minority as well as ``signifi-
cant'' shareholders. There is a difference
between board members who are share-
holders and those whose holdings are large
enough to give them an additional degree of
power.
Who is an independent director is a con-
tinuing and contentious issue. Institutional
investors are formulating their own definitions
of independence, which are perhaps best
taken as guidance rather than as diktats. Inde-
pendence is as much a matter of character, as
it is of age or length of board service. The
Spanish code10 makes an interesting point in
referring to the reliance which investors can
place on a director's independence. ``Of course,
this reliance will be greater depending on the
reputation of the chosen directors: markets usually
measure independence according to what the one
who breaks it has to lose.'' The translation may
not be elegant but the meaning is clear. In
effect, investors should look at the reputation
and track record of board candidates in
judging their independence.
There are good reasons why investors
should wish to ensure that this quality of
independent judgement is present in their
board team. First, there is the matter of
potential conflicts of interest of which men-
tion has already been made. The interests
which are most likely to diverge are those
of the executives and the shareholders over
such matters as directors' pay, takeover bids,
top management succession and how far
earnings should be paid out to shareholders
or reinvested in the business. Here, although
it is the board as a whole which must decide,
outside directors whose interests are less
directly affected are well placed to help
boards make their decisions in the best
interests of the enterprise.
A second issue is the evaluation of the
performance of the executives. The only
group which can carry out this vital task are
the outside board members. Assessing fellow
members of the board team and taking
decisions on the outcome of those assess-
ments is a duty which requires courage and
independence of judgement.
A third area where independent-minded
outsiders earn their place on the board, is in
respect of strategy formulation. One of the
participants in an OECD colloquium, I at-
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PRACTISE-BASED PAPERS
tended, said that if the outside directors only
prevented boards overpaying for acquisitions
they had more than earned their fees. I would
put the point more positively. An external,
objective view as to the direction a business
should take is an essential ingredient in the
strategic debate. It takes creativity and in-
dependence of thought to perceive where the
future of an enterprise might lie, when
executive attention is understandably concen-
trated on its present form.
There are issues of board structure which
are common to most codes. There is general
support, for example, for the establishment
of committees of the board. Audit, remuner-
ation and nomination committees are rec-
ommended, both for the tasks they perform
and for the way in which they buttress the
position of the outside directors. In particular,
a nomination committee is a means of
ensuring that the independence of judgement
of outside directors is not undermined by
their feeling that they owe their board seat to
the chairman or chief executive. Clearly the
pay of the top executives can only be decided
by the non-executive board members, hence
the need for a remuneration committee. The
case for audit committees was made in 1977,
when they became a listing requirement of
the New York Stock Exchange. Their impor-
tance and the need for boards to have
effective financial control systems in place
needs no underlining. The Canadian code11
goes further in recommending governance
committees: ``We propose . . . that each board
expressly assume responsibility for, or assign to a
committee of directors the general responsibility
for, developing the corporation's approach to
governance issues.''
Other matters to which codes refer are the
reporting responsibilities of boards, already
covered under the heading of disclosure, the
provision of timely and relevant information
in a usable form to outside directors, the train-
ing of directors, both in terms of their under-
standing of their role and their induction by
the boards they join and the issue of board
appraisal. This last point is likely to move
higher up the international governance agenda,
but it is an issue where at present North
America is making the running. The Cana-
dian code,11 for example, states: ``Every board
of directors will have in place some mechanism for,
at least annually, assessing the performance of the
CEO. Good governance requires the board to also
have in place a mechanism for assessing its own
effectiveness as a board and for assessing the
contribution of individual directors.'' Compare
that with the UK Hampel Committee's12 more
tentative comment on board assessment: ``We
believe that this is an interesting development
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11
which boards might usefully consider in the
interest of continuous improvement, though we
do not feel able at this stage to make a firm
recommendation on the subject.''
Code outcome
What has been the impact of these codes on
the governance agenda and on the balance of
corporate power? The first point to make is
that they have been followed, at least to the
letter, remarkably quickly. To give just one
example, the UK code recommended that
there should be an agreed procedure for
directors to obtain independent professional
advice in the furtherance of their duties. A
few leading firms had such a procedure in
place at the time the Code came out; barely
two years later the great majority of the
top 1550 companies listed on the London
Stock Exchange had implemented that rec-
ommendation.13 There were several reasons
why codes were broadly complied with, in
spite of their not having the force of law.
A basic reason was that most of the
committees which wrote the reports and
codes were set up and backed by bodies
representing those who were being asked to
comply with them. There was also an aware-
ness among board members in many coun-
tries that there were governance deficiencies
and that action needed to be taken to address
them. The emergence of global markets
represented a new and further challenge.
Competitive pressures increased both in the
market place and from investors. Many
companies were, therefore, looking for a lead
over how to respond and codes helped to
provide it. A further reason for compliance
was that the codes were based on best
practice. They represented what was already
in place in respected companies in the
countries concerned. This I believe to be the
key to the whole question of why governance
appeared on the public and corporate agenda
and why it remains there. A sound system of
corporate governance assists boards in their
task of directing their enterprises. I would not
have spent the time I have on matters of
corporate governance, were I not convinced
that it helps companies to meet their business
objectives, in sum that good governance is an
aid to good performance.
Governance and performance
This leads on to the whole question of the
relationship between governance and per-
formance. There is a limit to the light which
Volume 8 Number 1 January 2000
12
research can throw on this relationship.
Clearly, the factors governing the results of
a company over time are complex and early
attempts to correlate board structures ±
balance between executive and outside direc-
tors, whether the top posts were split and so
on ± and performance were of no operational
value. They covered too short a period and
they concentrated on the composition of
boards rather than on the quality of the
directors on those boards, which is the point
at issue. Structure is important and the
corporate casualty rate is sure to be higher
where governance structures are inadequate
or faulty. Much more important to overall
results, however, are the calibre of board
members and how well they work together as
a team, which in turn reflects the competence
of their chairmen. That is why the most
convincing study of the link between govern-
ance and performance is the one published
by Millstein and MacAvoy.14 They classified
boards by what they did, rather than by how
they were structured. Their conclusion was:
``Although the results do not prove causation,
corporations with active and independent boards
appear to have performed much better in the
1990's than those with passive non-independent
boards.''
Perhaps the most persuasive argument for
believing that there is a positive link between
corporate governance and corporate results is
that many investors believe that it exists. In a
recent UK survey,15 close to two-thirds of the
analysts and fund managers who took part
considered governance standards important
when making investment decisions. From the
practitioners' point of view, the most useful
field for further research would be into what
goes on inside boards; what are the differ-
ences in the ways of working and in the
make-up of board teams between successful
and less successful companies, looking at
success over a reasonable time period? Com-
mittees or boards are not natural forms of
organisation; teams are not formed by seating
people round the same table. The more that
research can concentrate on boards in action,
on process rather than structure, the greater
the chance that research findings will be
operationally relevant and acted upon.
Code consequences
This is the point at which to summarise the
consequences to date of codes of governance
practice. They have all been nationally in-
spired. They have relied for compliance on
what might more accurately be termed
market-regulation rather than self-regulation.
Volume 8 Number 1 January 2000
CORPORATE GOVERNANCE
That is to say that it has been in the
commercial interests of boards to comply
with code recommendations, because to do
so assists them in directing their companies
and demonstrates that they meet the stand-
ards today expected of well-run businesses.
Compliance should also encourage investors
to buy their shares and may even lower their
cost of capital. Investors, therefore, have a
similar interest in seeing that the companies
in which they have invested comply.
Codes have strengthened market forces in
relation to governance not supplanted them.
They have given boards a set of principles or
guidelines to follow in ways which make
sense in their particular circumstances and
which command the support of their share-
holders. They have encouraged investors to
communicate with the boards of the com-
panies in which they have invested and have
provided them with an agenda for their
dialogues. By encouraging shareholders to
use their influence and to play an active
governance role, they have assisted in a shift
in the balance of power which was already in
hand. In broad terms that shift is exemplified
by the action taken by the boards of US
companies like General Motors, IBM and
Eastman Kodak, when they made themselves
more independent of management and gave a
clearer lead to their enterprises. This action
was taken by the outside directors, who
largely form the boards of US corporations,
under pressure from investors. The same
process has taken place outside the US,
though patchily and to a less dramatic extent.
The market-driven changes, which codes
have reinforced, have tended to strengthen
the influence of investors, to strengthen the
position of outside directors within boards
and to have given boards as a whole a firmer
grip on their enterprises with executive
management more directly accountable to
them.
Code convergence
The degree of similarity between national
codes raises the question of convergence.
Karel Lannoo from the Centre for European
Studies16 argues that, at least within the
European Union, there should be a common
code and that the Dutch, English and French
codes are near enough to each other in their
recommendations to form the basis of an
European Code. He writes: ``A European-wide
framework of good corporate governance could
easily be established and would benefit European
industry and the stock exchanges . . . ''I think this
underestimates the difficulty of the task, given
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PRACTISE-BASED PAPERS
the different patterns of ownership and of
corporate structure in countries like Italy and
Greece already within the EU, let alone those
of countries applying to join. More funda-
mentally, I would question whether further
codification along the lines of the present
national codes is the right approach.
It is true that there are three initiatives
which cross national boundaries and that in
itself constitutes a change in the governance
agenda. One is the OECD report17 which was
published in April 1998. The OECD report
presents a set of perspectives for member
countries to take into account when consider-
ing statutory or voluntary corporate govern-
ance measures. The report recommends, for
example, that regulatory intervention be
limited to ensuring fairness, transparency,
accountability and responsibility, with the
aim of encouraging ``the development of im-
proved governance practices with strong emphasis
on government enabling voluntary private sector
development rather than attempting to regulate
it. . . . '' The OECD report sets out to assist
governments and corporations to use good
governance practice to improve their compe-
titiveness and to attract investment. It is a
primer for those drawing up codes and is not
in itself a code.
The second initiative has been the publi-
cation by the World Bank of its report on
corporate governance.18 This report puts
corporate governance firmly onto the world
stage. It is the outcome of a close, inter-
national working partnership between the
public and private sectors. It presents for the
first time a framework which encompasses
the widely differing regimes, political, econ-
omic and social, within which corporations
carry on their activities around the world. The
aim of the World Bank analysis is to stimulate
interest in governance issues, specifically as
they apply to the developing world, and to
translate that interest into action.
The Commonwealth Code of Corporate
Governance19 is the third of these inter-
national initiatives. It shares the same aims
as the World Bank study, but it is drawn up as
a code and it builds on specifically Common-
wealth experience in the governance field.
The Code sets out fifteen governance prin-
ciples, each of which is then described in
more detail. The principles are there for
Commonwealth countries to apply in ways
which meet their particular needs.
All three of these initiatives emphasise the
part which corporate governance has to play
both in promoting economic growth and in
curbing corruption. The economic growth
argument is straightforward and is based on
the link between governance and perform-
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13
ance, already discussed, and on the role of
governance in attracting investment. Equally,
corruption and fraud, whether in the private
or public sectors, can be most directly
contained by raising standards of corporate
governance. The arguments for so doing
stand on both practical and ethical grounds.
It is relevant that the original governmental
remit of the Olivencia Commission in Spain10
was to draw up an Ethical Code of Govern-
ance for companies raising funds on the
capital market. Because of the broad meaning
of the word ``ethics'', the Commission
decided to focus on a practical Code of Best
Practice which would attract widespread
business and public support. Nevertheless,
governance codes raise ethical issues and
these are likely to feature higher on the
international governance agenda with the
movement to establish broader agreement
on governance standards.
Market-driven convergence
The reason why I doubt the need to attempt to
produce European or international codes, along
the lines of existing national codes, is that the
market already has the matter in hand. There
are two forces driving governance standards
internationally towards convergence. First,
there are the institutional investors. Pension
funds alone own about one-third of the shares
of British companies and the institutions in
total own up to 75%. With ageing popula-
tions, institutional investment is growing
world-wide and the institutions are investing
outside their own domestic markets in the
search for higher returns and to spread their
risks. If companies and countries want their
investment, they must meet the standards
which these institutions demand in terms of
board effectiveness, of disclosure and of equal
treatment of all shareholders.
The capital markets of the world are the
second force. Expanding companies, wher-
ever they are situated, which wish to tap
international capital markets have to meet
the disciplines of those markets in respect
of transparency and financial reporting and
control. Thus institutional investors and
capital markets are bringing about a degree
of governance convergence world-wide. It is,
however, a convergence of standards not of
structures. There is no call for all companies
to adopt the same governance forms, pro-
vided that they achieve the same governance
aims. It is relevant to point out as well that
some of the differences between formal board
systems diminish markedly when the influ-
ence on them of informal systems are fully
Volume 8 Number 1 January 2000
14
understood and taken into account. Mark
Lehrer's study20 of the way in which the head
of Lufthansa reorganised his management
team to compete more effectively with British
Airways shows how formal structures can be
modified in practice.
Where a concerted and government-backed
effort to achieve convergence would be of last-
ing benefit would be in the matter of account-
ing standards. Markets are bringing about
greater consistency in financial reporting, but
two sets of accounting standards remain ± the
US Generally Accepted Accounting Principles
and those of the International Accounting
Standards Committee. An agreed set of inter-
national accounting standards would improve
financial transparency and lead globally to a
more efficient allocation of funds.
The emerging dominance of the inter-
national investing institutions alters the bal-
ance of governance power once again. I said
that codes such as the one published by the
committee which I chaired in the UK offered
a check list for boards and an agenda for
investors in their dialogues with boards. Now
it is the institutions themselves which have
taken up the challenge and are publishing
their own codes. TIAA-CREF,21 for example,
has brought out its Policy Statement on Cor-
porate Governance which, ``is offered as a basis
for dialogue with senior corporate management
and boards of directors with the objective of
improving corporate governance practices.'' Simi-
larly, Hermes in the UK has published its
Statement on Corporate Governance and
Voting Policy.22 Governance codification will
probably now be led by the major institu-
tional investors with the difficulty for com-
pany boards that the choice of governance
criteria will differ between investors. This
may lead boards to ask the institutions to get
together internationally and agree common
governance criteria, even though such collab-
oration will add to investor power. It would
be a further manifestation of governance con-
vergence. I suspect that initiatives by institu-
tional investors of this kind will shift the
governance focus, but before turning to that
point it may be helpful to consider some of
the issues which could feature on the future
governance agenda.
The future agenda
It is clear that the demands made on boards
have become greater and that boards are
expected to be more professional in their
approach to their duties. The twin tests of
performance and accountability have become
stricter and this turns attention to the way in
Volume 8 Number 1 January 2000
CORPORATE GOVERNANCE
which directors carry out their functions
individually and collectively. I would expect,
therefore, the question of training for direc-
tors to become a matter of importance to
investors and to financial analysts. What
corpus of knowledge should directors have
mastered before being nominated for a board
seat? What experience will enable them best
to contribute to the work of a board? What
forms of continuing education and training
might be relevant for directors? The pitfalls
are obvious, investors are looking for direc-
tors who will take intelligent risks and grow
their businesses, not for exam-takers. Never-
theless, this is surely a field which will
command more attention from investors and
directors than it does at present.
The follow-on is the issue of board appraisal
to which reference has already been made. If
boards are to raise the level of performance
of their companies in a highly competitive
world, they require some means of measuring
how effective they are at present and how
they might increase their effectiveness. Again,
this is no straightforward task and may well
require external assistance, but it is a necess-
ary one and investors can be expected to ask
boards to report on the steps they are taking
to assess their effectiveness. Such an approach
logically involves reviewing the composition
of boards with a view to arriving at the mix of
personalities and attributes which will add
most value to the board. This is likely to lead
to investors wanting to have more say in the
nomination process and in the selection of
board candidates.
Another issue on the board agenda will
surely be company purpose and the interests
which boards should take into account in
coming to their decisions. Investors expect the
directors to deliver results in terms of a
profitable and growing business. But what
other interests should they take into account
in achieving those results and what weight
should they give to each of those interests?
Questions of social responsibility and respect
for human rights are being raised by share-
holders at general meetings, as are concerns
about the impact of corporate activities on the
environment. Boards are accountable to
shareholders, but the views of shareholders
vary and the wider the issues which boards
are expected to take into account, the greater
is likely to be the degree of variation.
Conclusion
This leads me to my conclusion which is that
the corporate governance debate may begin to
focus more on shareholders and in particular
# Blackwell Publishers Ltd 2000
PRACTISE-BASED PAPERS
on the investing institutions than on boards.
Investors have grown in power, they are
issuing their own codes and holding boards
accountable for their performance, but to
whom are they accountable? A single insti-
tution may be in a position to determine
whether a takeover bid succeeds of not. Such
decisions can have considerable economic
and social consequences. Ought they not to
be taken in the light of the views of those
whose money the institutions are investing
and which has given them the power to make
those judgements?
Institutions are now beginning to use their
votes and influence and are likely to do so on
an increasing scale. The question, therefore,
of how they decide what is in the best
interests of the spread of clients whom they
serve becomes more crucial. Members of
pension funds may be concerned first about
the level of their pensions, but they will also
be concerned about the nature of the society
into which they will be retiring. In the past it
would not have been practicable to canvass
the opinions of fund members, given the
layers of authority between members and
fund managers. Now, with advances in
information technology, it would be feasible
for individuals who wish to have a voice in
the governance decisions of the institutions
investing their money to do so.
We have seen investors pressing boards to
take a firmer grip on their enterprises in order
to improve their performance. This in turn
has increased the influence of outside direc-
tors on boards and strengthened the hand of
boards in relation to executive management.
Boards have thus become more accountable
to investors, primarily the institutions. May
not the next step be for investors to become
more accountable to those on whose behalf
they are investing? Will the accountability of
institutional investors move to the top of the
future governance agenda?
Notes
1. Committee on the Financial Aspects of Cor-
porate Governance 1992, ISBN 0-85258-915-8.
# Blackwell Publishers Ltd 2000
15
2. PRO NED, sponsors included the Bank of
England, the London Stock Exchange, the
Institutional Shareholders Committee and the
Confederation of British Industry.
3. The Company Chairman, Director Books 1995,
ISBN 0-13-434150-3.
4. Power and Accountability, Robert Monks &
Nell Minow, Harpers Business 1991, ISBN
0-88730-512-1.
5. The Evolution of Corporate Governance in the
US, Ira M. Millstein, 2nd February 1998, World
Economic Forum, Davos.
6. Corporate Governance in the Netherlands,
28th October 1996, Amsterdam.
7. Interim Report, Corporate Governance Forum
of Japan, 30th October 1997.
8. Corporate Practices and Conduct (3rd edition),
FT Pitman, ISBN 0-729-90328-1.
9. Draft Report of the Belgian Commission on
Corporate Governance 1998.
10. The Governance of Spanish Companies, Feb-
ruary 1998, translated by EuroForum.
11. ``Where Were the Directors?'' Toronto Stock
Exchange Committee on Corporate Govern-
ance in Canada.
12. Hampel Committee on Corporate Governance,
January 1998, ISBN 1-86089-034-2.
13. Compliance with the Code of Best Practice,
May 1995, ISBN 1-86089-006-7.
14. The Active Board of Directors and Perform-
ance of the Large Publicly Traded Corpor-
ations, Ira M. Millstein, Paul W. MacAvoy,
Columbia Law Review, Vol. 98, No. 5.
15. Governance, September 1996, No. 40.
16. Karel Lanoo, Corporate Governance from a
European Perspective, Centre for European
Policy Studies, Brussels.
17. Corporate Governance, OECD Report, April
1998, ISBN 92-64-16056-6.
18. Corporate Governance: A Framework for
Implementation, The World Bank Group,
August 1999.
19. CACG Guidelines: Principles of Corporate
Governance in the Commonwealth, Third
Draft, August 1999.
20. A Tale of Two Airlines, Mark Lehrer, WZB
Social Science Center, Berlin, 1998.
21. Teachers Insurance and Annuity Association ±
College Retirement Equities Fund, Policy
Statement on Corporate Governance, October
1997.
22. Statement on Corporate Governance and
Voting Policy, Hermes Investment Manage-
ment Ltd, July 1998.
Volume 8 Number 1 January 2000