The IoD's View

The current financial crisis is increasingly presented - particularly in the media - as a crisis of corporate governance. However, are current problems symptomatic of broader problems in the UK model of corporate governance, or are they specific to the regulation of the financial system? This question is addressed in a recently published policy briefing: "The UK Model of Corporate Governance: an assessment from the Midst of a Financial Crisis".

The key conclusion of the study is that the UK model of corporate governance, after 15 years of development, has attained a position in which it is broadly "fit for purpose". In contrast to the legislatively-based approach of the United States, the UK framework promotes high standards of corporate governance behaviour without stifling wealth creation.

However, there are no grounds for complacency. Efforts to further improve corporate governance should focus on intensifying the dialogue between boards and shareholders, the effectiveness of non-executive directors, and more meaningful implementation of the "comply or explain" principle. There is also a need to address the distinctive governance needs of smaller companies. Longer term, the UK corporate governance approach - based on the assumption of significant dialogue between boards and UK institutional investors - must also adapt to the challenge of a transformation in the ownership structure of UK plc.

Finally, the briefing argues that policy responses to the current financial crisis should focus on the recapitalisation and de-leveraging of vulnerable financial institutions. Knee-jerk changes to the broader corporate governance framework should be resisted. The regulatory burden imposed on boards is already significant, and an excessive focus on compliance - rather than issues of strategy and value-creation - undermines the viability of the UK's unitary board concept. The introduction of direct government controls in areas such as private sector executive remuneration would be counterproductive, and do little to resolve problems of liquidity and solvency in the global banking system.

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