Corporate governance codes are not working

I heard an extreme sportsman on the radio the other day. His job involves jumping out of airplanes with a GoPro camera and skimming past cliff faces at incredible speeds.

When asked if he was nervous participating in such dangerous sports, he described how the first jump was terrifying.

When you’re jumping for the hundredth time, it is actually quite boring, he added. You think nothing of it.

At first, I doubted that this transition from extreme to routine could be possible. However, it may not be restricted to adrenaline-fuelled extreme sports.

Do you remember Polly Peck? Perhaps BCCI? Definitely Robert Maxwell.

These were the business scandals of the later part of the last century that led the business community to conclude that there was something wrong with corporate governance.

There was a general sense of unanimity that these scandals were so damaging that something needed to be done.

As a result, the Cadbury report in 1991 proposed a system of corporate standards designed to usher in a new era of transparency based on the idea that good corporate behaviour was good business.

Business leaders queued up to pronounce that Polly Peck’s Asil Nadir and Robert Maxwell were outliers, one-offs that couldn’t happen again.

We were encouraged to believe that you shouldn’t let a few rotten apples ruin the barrel.

Some 25 years, later the barrel does seem to have become infected. Nadir and Maxwell have moved from extreme to routine.

Polly Peck transferred payments of some £58m to subsidiaries in northern Cyprus and Turkey. This would barely merit a mention in the middle of the €1bn accounting scandal recently admitted by Toshiba in Japan.

Ironically, Toshiba’s announcement came just six weeks after the introduction of a new corporate governance code in Japan.

It was meant to pave the way for more transparency and openness following the remarkably similar Olympus accounting scandal, where over €1.5bn of losses were concealed.

In Germany, the Volkswagen emission revelations managed to wipe €30bn from the car maker’s share price in a number of days. We are told that a few bad apples in an isolated engineering unit are responsible.

Last year, over £2bn was wiped off Tesco’s share price following the disclosure that it had been overstating profit forecasts.

The corporate failures that led to the BP Deepwater Horizon incident in the Gulf of Mexico not only led to the tragic loss of life and environmental damage but also caused the BP share price to slump by 50%.

Famously in the US, Enron’s accounting scandal led to the loss of $75bn in shareholder value and to the collapse of a major accounting firm, Arthur Andersen.

In the US, one can also add to the list Tyco, Global Crossing, and Adelphia to name but a few. What have all these got in common? They are not banks.

You could be forgiven for having formed the impression over the past few years that banks had cornered the market in corporate governance scandals. Indeed, the financial miscreant list is very long.

Last May, US and UK regulators fined six major global banks, including the prestigious Barclays, UBS, and Citi, nearly $6bn between them for rigging the foreign exchange market and Libor interest rates.

Corporate culture had reached such a point in Barclays that one of its employees felt able to write in an online chat room: “If you ain’t cheating, you ain’t trying.”

Add in the recurring saga of insurance misselling and bank overcharging and, let’s not forget, UBS and the £2.3bn Adoboli rogue trading loss nor JP Morgan’s ‘London Whale’ debacle.

In the US, the Senate made findings concerning HSBC’S dealings with Iran and Mexican drug money.

In 2012, US regulators noted that the British Bank Standard Chartered colluded with the Iranian government for almost an entire decade, reaping hundreds of millions of dollars in fees through thousands of secret transactions, for a total haul of $250bn.

And I still haven’t mentioned any of the fallout from the Lehman’s collapse or our own banking bailout, including the activities of Anglo Irish Bank.

The current system of self-regulated corporate governance does not appear to be working and does not appear to be capable of reforming itself.

Assurances that lessons have been learned and that it won’t happen again appear hollow when confronted with the evidence. We have become accustomed to corporate bad behaviour and inured to the absence of accountability.

Perhaps most concerning of all, we appear to have accepted that the extreme has become routine.

The obvious conclusion must be that self-regulation and voluntary codes of practice have run their course and that it is time for governments to step in and referee the match. Or at least refer it to the TMO.

Eugene McErlean is a leading expert on corporate governance and banks.


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