The Financial Reporting Council’s Complete Horlicks

The Financial Reporting Council (FRC)’s latest publication, “Proposed Reforms to the UK Corporate Governance Code”, is rather a waste of time. Changing an ineffectual and irrelevant code, even though at considerable expense to the tax payer, is hardly a matter of huge importance. And when the changes themselves are so slight they will have no impact at all on what is done, the significance is disappearingly small. But perhaps that was the intention.

Either way, Sir Christopher Hogg, midwife to the proposed “reforms”, was interviewed this morning (1.12.09) on the BBC’s Today programme and explained that the great virtue of the changes was in addressing how the spirit, rather than the letter, of the code should be adopted in Britain’s board-rooms. Lest anyone should imagine anything of significance was afoot, he hastened to point out that everything was just fine in corporate governance matters beyond the financial sector.

The purpose of the code is stated as ‘to promote high standards of corporate governance’ and thus help ‘a board discharge its duties in the best interests of shareholders.’ Sir Christopher and colleagues acknowledge that the “comply or explain” approach, which they avidly pursue rather than regulation, ‘will only work well if there is effective engagement between companies and shareholders.’ This is a problem, since in many highly strategic situations, such as mergers and takeovers, the interests of companies and shareholders do not coincide and may be in fundamental conflict.

The code is not overly concerned with stakeholder interests other than those of shareholders. Under Sir Christopher Hogg’s leadership, it appears to have become fully Friedmanite in its rejection of any other social responsibility than to (quoting Friedman) ‘make as much money as possible for stockholders’. ‘The Rise and Fall of Management’ discusses how this is clearly in breach of the law, even if reflecting and further consolidating widespread custom and practice.

All the sensible stuff in the code about the roles, duties and election of chairmen and non–executive directors is drowned in this sea of irrelevance. The FRC itself expresses concern that ‘too many companies, investors and their respective advisors pay more attention to the detailed provisions of the Code than they do to its high level principles.’ What a surprise!

Behaviour sanctioned, if not enthusiastically approved, by the code will continue to include the extraction of value from companies making and supplying goods and services in the real economy, and the paying of that value over to those ‘investors’ who saw the opportunity of a quick killing for their clients. And themselves.

3 thoughts on “The Financial Reporting Council’s Complete Horlicks”

  1. I suppose this then begins to raise the question of the shareholder company too? If the problem is, fundamentally, that there are too many hangers-on keen on extracting whatever they can get from various companies (including those in financial services) then might the answer be to ensure that it is not so easy to buy and sell shares in businesses? Perhaps shareholders should also be stakeholders? Otherwise, the great and the good will carry on telling the rest of us how careful they are being, and being rewarded handsomely for doing so.


  2. I agree it would be good if there was some friction in the process of buying and selling shares at least where such deals affect the continuing autonomy of the company. One way of introducing that friction could be to enfranchise employees (as the major stakeholder) with a proportion of the vote, say around 25%, on all mergers and acquisitions. Such employee voting rights could be established with or without ordinary equity ownership.


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