Regulation: Called to account by law: SEC-style rules could soon dictate corporate governance in the UK

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The Independent Online
SIR Adrian Cadbury - chief begetter of the code that bears his name - has great faith in market forces. But even he accepts that, if it is felt in two years' time that companies have made insufficient progress on corporate governance, legislation to force change is likely.

Much of the Cadbury code is based on the Treadway Commission report on corporate governance, produced in the United States in 1987. So any legislation in the UK will probably be based on rulings of the Securities and Exchange Commission.

As with the Cadbury inquiry, the Treadway investigation was a response to a large number of frauds and company failures that came to light soon after financial statements showing the companies concerned to be in good health.

Some recommendations are now enshrined in law, and others are becoming so. At the end of last year, for example, the SEC brought in a ruling on 'proxy reform'.

Previously, if 10 or more shareholders of a company gathered to discuss anything, they had to file records with the SEC, so that their deliberations became public information. It was a cumbersome process and limited shareholders' influence on a company's management.

Now any number of shareholders can gather together to discuss company policy - to the extent of taking out newspaper advertisements declaring how they will vote on an issue and soliciting other shareholders' views - without needing formal SEC permission.

According to Larry Leva, SEC partner in the London office of KPMG Peat Marwick, the recent departures of the chairmen of General Motors, American Express and IBM bear witness to this new-found power and influence.

At the same time, the SEC brought in a rule on executive compensation. For the past three years, all forms of compensation of the five highest-paid officers in a corporation must be clearly and simply laid down. Moreover, the compensation committee has to disclose its methods of setting compensation. Alongside this, the company must show its results in terms of total returns to shareholders - dividends and share price - over a five-year period, compared with others in its industry and / or the Standard & Poor's 500 index.

'This one is trying to catch those situations where remuneration is heading north and returns to shareholders are heading south or staying flat,' said Mr Leva. 'It puts tremendous pressure on managers and gives shareholders another stick to beat them with.'

The SEC is also considering whether management reports (a statement by management that it takes responsibility for its financial statements and internal controls) should be included in SEC filings. The sticking-point has been coming up with a working definition of 'internal controls and standards'.

Mr Leva said it was only a matter of time before similar legislation was introduced in the UK. 'UK institutions will see the information available to their US counterparts, and the power they wield, and will want the same thing.' He added that investors in US companies would want to exert the same pressure on the UK companies in which they had interests.

However, Jonathan Charkham, special adviser to the Governor of the Bank of England and a member of the Cadbury Committee, disagrees with Mr Leva. Mr Charkham argues that every country's corporate governance system reflects its history and its fundamental social attitudes. He said the highly litigious US culture ('to an American 'due process' - the right to go to the law - is absolutely critical') had determined its governance system and 'hence SEC legislation'.

Mr Charkham said shareholders in the US had been known to sue company directors for accepting a takeover bid that shareholders believed was too low. In Japan, by contrast, taking recourse to the law is regarded as 'a very sad and shameful admission of the failure of human relationships'.

Mr Charkham agrees with Mr Leva, however, that US shareholders are more interested in corporate governance matters and express their views more publicly than their UK counterparts. Even private shareholders are active.

Many belong to the United Shareholders' Association, which grades companies according to their compliance with what it considers to be good principles of corporate governance, and tackles those it considers poor performers.

And there is a growing feeling that more active shareholders will do as much as anything to influence corporate governance in the UK.

Meanwhile, Sir Christopher Hogg, chairman of Courtaulds, Reuters and SmithKline Beecham, which are all listed in the US, stresses that the pedantry and bureaucracy involved in complying with SEC regulations would not be welcome on this side of the Atlantic. 'SEC requirements don't necessarily make people any more sensible, nor does the US system of corporate governance make US companies more effectively governed than they are in the UK,' he said.

He welcomed more disclosure and higher standards in the UK as 'vital in an increasingly competitive marketplace'. But he warned: 'My biggest fear is that people may forget that business is about risk taking and start to play the process.'

He drew attention to the very first paragraph of the Cadbury report: 'The country's economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain's competitive position. They must be free to drive their companies forward but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance.'

(Photograph omitted)