BOOK REVIEW / Sweet dreams for Sir Adrian Cadbury: 'Keeping Good Company' - Jonathan Charkham: Oxford University Press, 19.95 pounds

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The Independent Online
There is a temptation to regard any criticism by the Institute of Directors as a sign that you are doing at least something right. Consequently, it is unlikely that Sir Adrian Cadbury is losing any sleep over last weekend's attack on his committee's code of practice by the organisation's director-general- elect.

After all, the august body from Pall Mall is so committed to free- market ideology that it could never be expected to relish the prospect of the sort of corporate governance proposed by the Cadbury Committee - no matter what welcoming noises it initially made. To it, the idea of outsiders snooping about and telling professional managers what to do is anathema.

The only problem with this argument, of course, is that these managers have not always fared well without supervision. Indeed, it was concern at the rate of failure that prompted the London Stock Exchange, the Financial Reporting Council and the accountancy profession to set up the Cadbury Committee in May 1991. The previous few months had seen a spate of corporate collapses, including Polly Peck, Maxwell and Coloroll, where - as Jonathan Charkham puts it - 'the weakness of corporate governance was clearly a contributory factor'.

And it is worth remembering that, when the committee - of which Mr Charkham is a member - reported in late 1992, it was criticised as much for the leniency of its recommendations as for its tendency to prescribe.

But if fierce debate raises interest, then Mr Charkham stands to profit from the IoD's intervention. For this book, subtitled 'A study of corporate governance in five countries', ought to be required reading for anybody looking to throw in their twopenny-worth.

A former adviser to the Bank of England and the first director of Pro Ned, the organisation that promotes non-executive directors, the author is better placed than most to carry out the task. And if the resulting volume is a little less hype-laden and racy than those that usually drop on managers' desks, he does as good a job as possible with a subject that, although it creates great controversy, is not of itself thrilling.

Indeed, since the term 'governance' is generally reckoned to have fallen out of use until Harold Wilson produced his slim volume The Governance of Britain in the late 1970s, there is even uncertainty about what it means. Mr Charkham, though, has adopted the definition given by the Cadbury Committee - 'the system by which companies are directed and controlled' - and looked into how that applies in Britain, the United States, Germany, France and Japan.

With a lengthy chapter devoted to placing what happens in each in its appropriate political and social perspective, he provides a useful overview that describes differences and similarities between these leading industrialised countries. At one point, he even writes that in each country 'corporate governance holds up a mirror to society in general'.

So in Japan, 'there appears to be a general consensus . . . that although profit is important, the long-term preservation and prosperity of the family (which is how companies are viewed) are and should be primarily the aim of all concerned'.

Meanwhile, in the United States the guiding principles are 'sunshine and due process' - in other words, there is a set of rules enforced by the Securities and Exchange Commission designed to provide information, while comparatively easy access to the legal system is provided by contingency fees, class actions and derivative suits.

But, fascinating as these and other insights are, the most eagerly read chapter is likely to be the last one, 'Which system is best?' Although Mr Charkham understandably refrains from coming down in favour of any one system, his discussion of the criteria for so deciding is invaluable in explaining what good corporate governance is all about - and, more important, what it is not.

Having pointed out that the role of corporate governance is to enable companies to 'draw on the constructive vitality of its people while containing the effects of their weaknesses', he suggests that the test of a good system is not the number of companies from which poor CEOs are removed, but the number of times a CEO is so competent that he or she can reach retiring age in place.

If that sounds somewhat prosaic, he divides this test into two criteria - dynamism and accountability. The former is the attribute that the IoD and others seem most concerned about losing, but Mr Charkham suggests that the preponderance of takeovers in the 1980s has devalued it in the United States and the UK. As one might expect of two economies where executive pay deals make the headlines about as frequently as company failures, he does not rate them too highly in the latter either.

But while pointing up the apparent strengths of the German and Japanese systems, he does not totally condemn the Anglo- American approach. 'The problem for the USA and UK is not one of diagnosis or prescription but of will and self-interest,' he writes. 'Many people are locked into the system and do well from it; others less prosperous nevertheless fear change.' Quite.