Contributors to this programme:
CEO Tullett Prebon
Lord Paul Myners
Financial Services Secretary to the Treasury 2008-10
Senior Portfolio Manager for Corporate Governance, CalPERS
Chairman Restoration Partners
Baroness Sarah Hogg
Chairman Financial Reporting Council
Professor Bob Tricker
University of Hong Kong
Peter Day's Webcomment:
About this programme by Peter Day
It is some 35 years since I started reporting on business, and it was then a rather secretive world. Particularly the City of London, where the money came from.
The Powers That Be were very keen on Not Talking Out Loud. They were mindful of the way the 19th century constitutionalist (and editor of The Economist) Walter Bagehot described the powerful mysteries of the monarchy: “We must not let daylight in upon the magic”.
Companies were often reluctant to explain themselves to journalists and outsiders. Dealers in government bonds regarded the workings of their vital market as rather a state secret.
And regulation was self regulation: the stock exchange looked after jobbers and brokers, other markets policed themselves, and over all ruled the Governor of the Bank of England.
The Board of Trade, the then archaic name for the department of industry or whatever it is now named, called in inspectors as a very much last resort, and rarely.
The famous phrase was that the City was governed by the Governor’s eyebrows, subtle but absolutely emphatic.
In that old boy’s network, with its web of partnership firms, the Governor's disapproval could damn dodgy companies to an outer circle of hell, still in business but shunned by most of the people who ran the City.
Innovations (such as contested takeover bids) had a difficult time; those behind them were regarded as outsiders for washing the City’s dirty linen in public.
In a few years though, their innovations became the norm, and made the banks and advisors who pioneered them very rich and powerful indeed.
Then came what the City called Big Bang, in 1986. This complete change in the financial landscape created dozens of new millionaires who sold the old partnership-based stock market firms to the international investment banks who rushed to buy a presence in London.
The new investment houses could no longer be bound by the old motto of the London Stock Exchange: “My Word is my Bond”. Trust was no longer enough: enter the lawyers, the risk managers, the compliance officers. Enter the regulators.
Now, financial market regulation has long tended to be much shutting of stable doors after bolted horses.
One of the first regulators (before Big Bang as it happens) was the Takeover Panel. As the black art of takeovers developed from the first contested one back in 1959 (for British Aluminium), a succession of rules were imposed on the conduct of bidders, mostly to prevent the repeat of a new outrage.
Big Bang made financial regulation statutory.
Meanwhile the owners of companies had been changing, too. As the stock market expanded, huge pension funds took the place of rich private investors.
And from the 1980s onwards, a succession of British government privatisations brought millions of new shareowners into the picture. The City was no longer a private world of insiders, or at least it could not longer behave like that.
Hence the emergence of concepts such as Corporate Social Responsibility and Corporate Governance, not much talked about in the old days. These ideas are what this programme is all about.
Despite the rise of outsider scrutiny of the City, large elements remain of the old predilection for self regulation.
And even though companies are increasingly operating on a global basis, governance is still a local matter.
In the USA, lawyers dominate corporate governance, as they dominate so many other aspects of American life. Big fines are thrown at offending corporations, who pay up without admitting liability, a curious civil justice.
Things that are now frowned on in British corporate behaviour (such as companies where the chairman and the chief executive are the same person) remain OK in the USA.
They do things differently there. So do they in Europe, with two-tier boards of German companies, one for operations and one for oversight.
But now the EU is getting wary of what it calls Anglo-Saxon Capitalism. In Brussels they have issued a consultative green paper on corporate social responsibility.
The City of London fears that it is in danger of being tied up in official European red tape, bristling with legal requirements.
So London still puts great faith in its codes of behaviour: one for companies, and a new one for the stewards of companies: the investment and pension funds who mostly own company shares.
The London principle is Comply (with the Codes) or Explain (why not). It is an elegant form of continuing self-regulation: yes there are rules, no, they are not compulsory.
Germany has the same sort of thing, with its different board structure.
It ought to mean that companies who refuse to adopt the principles (by not putting directors up for annual re-election, for example, or not having a board performance evaluation every three years) signal that clearly to investors who may (in theory) become less keen on owning their shares.
There will always be corporate scandals. But with this increased emphasis on corporate governance (and shareholder responsibility) we ought to get more advance warning about Bad Companies. Perhaps.
Insights into the business world with Peter Day - featuring content from his Radio 4 In Business…