Why are we tinkering with corporate governance?
The Government has reacted to events at private and public companies which have led to shareholders, employees and pensioners being badly affected. It is clear that there will be a continuing focus on corporate governance and various rules may be introduced to shut the boardroom door after the director has bolted.
And once the door is shut and the bolting has been done, where should our attention fall? I’m not sure that further corporate governance rules for companies will make much difference. Experts in this field say that UK corporate governance practice is the gold standard across the globe.
So why are we always tinkering with them? Politicians rightly get very upset when their constituents are badly treated. They want to see action. They threaten new laws unless codes and practices are changed. Inevitably the focus is on the perpetrators, the companies.
The "bad" companies cause "good" companies to add more cost and resources to proving their virtue to shareholders. Investors always want more rules so that the responsibility for failure rests solely with companies.
And the cost of failure on a company’s reputation can be considerable. According to our latest QCA/YouGov Small and Mid-Cap Sentiment survey, companies estimate that 32 per cent of their market value is accounted for by reputation. This has increased from 28 per cent since last year, indicating perhaps that recent reputational issues for VW, Samsung, TalkTalk and others may be influencing opinions.
Extrapolating this using data from the FTSE indices, the value of corporate reputation of the FTSE All-Share amounts to an amazing £736,742m and the value of corporate reputation of the AIM All-Share is £17,657m.
72 per cent of companies see reputation as being important enough for their business to take active steps to manage their reputation. However only 42 per cent of advisers agree that companies have made some preparations for a reputational crisis whilst 56 per cent are of the opinion that companies are not well prepared.
Investors may want to consider stepping up the questions they ask in this area. One adviser remarked in our survey that small-cap companies have “limited resources to call
upon. Relying on abilities of a small group of executives”.
So perhaps when major challenges arise companies will find out whether they have been doing the right things to ensure that they have mitigated any controllable threats and organised themselves so that they can operate their business model in an entrepreneurial and well managed way. I don’t think that changes to corporate governance codes will make "bad" companies safer or "good" companies better. The "good" companies understand what they need to achieve and create the right approach in any event.
Slavishly following a corporate governance code will not produce a "good" company. There’s a huge difference between saying something and actually doing what you say. The key ingredient is growing the right culture which creates an "antibiotic" that kills off the bad stuff and enables the corporate entity to flourish.
Communicating corporate governance is very important as it’s a means to convey the information necessary to engender trust between the owners of the business and the
operators of the business. That in itself is very important.
But at the end of the day to grow the antibiotics that prevent the growth of contaminating bacteria you need an effective culture. Good practice that leads to out-performance lies in having the right culture to grow "good" bacteria and see off the "bad" stuff. It’s about creating the environment which inspires the right behaviour. Done well it creates great performance.
In its absence 32 per cent of your value might be infected.
Tim Ward is Chief Executive of the Quoted Companies Alliance, the independent membership organisation that champions the interests of small to mid-size quoted companies.