New codes needed to tackle short-termism

Published: 28 February 2013 at 11:19

Anglia Ruskin academic proposes updated definition of corporate governance

A new definition of corporate governance to tackle the potential dangers posed by the “ownerless company” has been proposed by an Anglia Ruskin University academic.

Writing in his latest book Theory and Practice of Corporate Governance, published on 28 February by Cambridge University Press, Stephen Bloomfield states that the financial collapse of 2007-08 was partly brought about by the governance codes that control the behaviour of listed companies and that the current definition, taken from the 1992 Cadbury Report, is no longer fit for purpose.

The corporate governance reforms of the 1990s, particularly those contained in the Greenbury Report, accelerated the trends to short-termism.  By formally establishing a link between shareholders’ returns and the pay of managers expressed as bonuses, Bloomfield claims that the corporate governance codes have built instability into the system.

The book goes on to argue how this link, supposedly monitored by shareholders but actually determined by managers of the large companies, has strengthened the fixation on short-termism and allows the managers to inflate their own rewards at the expense of the security and safety of the businesses they are responsible for.

Bloomfield, Director of the Corporate Governance Unit at Anglia Ruskin’s Lord Ashcroft International Business School, said:

“The standard definition of corporate governance taken from the Cadbury Report of 1992 is seriously flawed in that it clumsily articulates links which only partially describe the ways companies, managers and shareholders now interact.
“Unfortunately the Cadbury definition has formed the basis for all subsequent investigations into corporate governance in the UK.  As such, the definition’s shortcomings have been carried through into policy and have even prompted the inclusion of stipulated structures of executive pay, which has proved to be so damaging to the economy.
“Since the time of the original report, many of the trends which were then only nascent have become full-blooded.  These include the pursuit of short term profits by both companies and investors, the disruption of the links between managerial pay and the pay of those who form the bulk of the workforce in the same companies, automatic trading of shares by machine-based systems, and sophisticated trading strategies that supposedly ‘eliminate’ risk. 
“Because of the change in the relationship between shareholders and the directors, the modern listed company is now almost an ownerless company, controlled by the whims of managers rather than the collective wishes of shareholders.”

In his book Bloomfield suggests a number of changes, including breaking down the concept of corporate governance into four categories, which would better enable future problems to be highlighted and managed.

These are “procedural governance”, which deals with matters of share ownership and shareholders rights, and is regulated by law; “behavioural governance”, which is the way that directors approach their tasks and is controlled by regulation and codes; “structural governance”, which is the way that companies behave under the guidance of the board of directors and is determined by ethics and morality; and “systemic governance”, which is the operation of oversight by regulators and the political system.

Bloomfield added:

“Radical thinking is needed to take into account how companies are now stewarded, the role of the modern shareholder and the length of time that shares are held for, and further advances in trading technology will only accelerate these trends.  The system of corporate governance must take into account such developments if it is to continue to be meaningful and not merely an empty exercise in box-ticking.”