Saturday, 2 July 2011

Is 'best practice' working as intended?

There are a couple of notable trends in UK plc boards this year that may tell us something about our corporate governance regime. First up, it's clearly the case that the majority of FTSE350 companies have introduced annual elections for board members, and looking just at the FTSE100 compliance is especially high. Given that most company opinion was negative, the scale of change maybe surprising to some.

Second, according to The Grauniad, the number of female board appointments so far this year is already significantly up on the whole of 2010. The numbers involved are actually pretty small, so change can be exaggerated, but the increase is definitely there. This may well be a reaction to the Davies Review which hasvset out a voluntary 25% target for female board membership.

In both cases companies are under no obligation to adopt the new policy, and indeed the 25% target suggested by Davies isn't even in the Corporate Governance Code, which instead is being amended to suggest disclosure of diversity policy and reporting on its application. And in both cases there was also antipathy on the part of companies to any intervention. Yet now that both bits of best practice guidance are now in place, companies are responding.

So what's going on? Do companies over-egg their opposition to reform in public but privately accept the need for change, is it a delaying tactic? Is it that they feel once something is best practice then the 'flexibility' of non-compliance has costs that outweigh its benefits? Maybe companies believe that non-compliance would be seen as a red flag by investors, with potential financial ramifications. Perhaps in relation to the Code in particular they feel that... ahem... box-tickers will force them into compliance anyway.

Whatever the explanation, or combination of them, it looks like 'best practice' is operating more and more like regulation. Which in turn makes you wonder whether regulating some aspects of governance wouldn't be a simpler approach.

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