No more codes, please!

ICAEW have published the fifth of their discussion papers on corporate governance, calling for the establishment of an overarching "framework code", to embrace the group-specific codes that have sprung up in recent years. The paper raises several questions.

1. What is the proposed "framework code" for?

It is not clear exactly what problem the "framework code" is designed to address and the idea adds further confusion by blurring the boundaries of corporate governance to include "everyone involved in corporate governance". The Takeover Code which is cited in the paper works well because it is directed at managing a very specific area of activity where the potential problems are clearly understood. The well-established Panel structure permits comprehensive representation of clearly defined groups of stakeholders.

2. Where would such a "framework code" sit?

The paper suggests that it would encompass a very wide range of stakeholders. Basic principles need to sit within a structure of agreed ownership: the FRC currently "owns" the UK Corporate Governance Code but it would be difficult to justify the same organisation taking responsibility for a "parent" code which would sit above this.

3. What does "framework" mean?

The OECD Principles are also cited in the paper: how would a "framework code" differ from these? The use of the word "framework" resonates worryingly with the conceptual framework for financial reporting, a never-ending project which can hardly be described as a success. (See here, here, here and here for some thoughts on this.)

Proposals for change can only be successful if they are based on a careful assessment of the current situation and a good understanding of how this has developed, to ensure that such proposals address real problems and recognise the potential consequences of change.  Although the Cadbury Code focused very specifically on the financial aspects of corporate governance and on the role of the board of directors, it was very much of its time and the world has moved on. The consequences of its implementation have not been properly assessed, either from the perspective of regulatory impact or from that of corporate boards themselves.  From a regulatory perspective, the UK Corporate Governance Code is now unwieldy because every review has added further detail about implementation, rather than reconsidering the assumptions which underpin the principles. Within companies, the emphasis on independence and the role of NEDs has led de facto to a two tier board system which has yet to be acknowledged from a regulatory perspective. Does the unitary board which brings together NEDs and executive directors still exist in any major plc? How does a main board peopled by NEDs interact with an executive board or executive committee?

There is an urgent need to reassess the current corporate landscape and the assumptions on which the underlying principles of UK corporate governance arrangements have been built. Our legislative framework evolved under very different economic and social conditions. Is this legislation still fit for purpose? The proliferation of codes suggests that it is not.

As well as a fundamental overhaul of legislation at national level, there is scope for change at organisational level. Some interesting ideas have been offered by academics. A US legal scholar has argued that the board of directors could be scrapped in favour of quite different corporate governance arrangements which better reflect the interests of those involved. The analysis put forward by Colin Mayer in his excellent book "Firm Commitment" makes a good starting point for some radical thinking.

The ICAEW papers on corporate governance may be effective if they prompt a wider debate but that debate needs to be grounded in a clear identification of the scope and boundaries of the problems faced, a rigorous assessment of the capacity of current legislative and regulatory arrangements to deal with those problems and a careful consideration of the potential for unintended consequences.