LET’S be blunt: there’s a serious problem with corporate governance. Corporate trust is being eroded and unless something is done, this trend will continue.
Edelman PR publish an annual Trust Barometer, which tracks public trust in major institutions across all sectors. The latest barometer shows – unsurprisingly – that trust in politics was “volatile”, while trust scores for banks, insurers and the media were the lowest. The healthcare and technology sectors scored highest.
When asked about what helped corporate reputation, 70 per cent of respondents selected “a company I can trust” from the available options, while 64 per cent said that high quality products and services were important. These findings were repeated globally, underscoring the point that trust is an issue confronted by businesses everywhere.
The UK is suffering from an acute lack of trust. High profile scandals and problems in politics and the financial sector have seriously dented public trust. The demise of banks, MPs’ expenses and the catalogue of business and corporate failures over the years mean it is time to rethink corporate governance, for the private and public sectors.
So should there be a common approach to corporate governance and a shared set of ethical standards for both public and private sectors? Some are against it, saying that the differences in practice and culture from the two sectors are insurmountable problems.
However, the public sector is changing rapidly. The public ownership of banks, the growth in partnerships and private sector providers delivering public services make it even more relevant to review the governance landscape and consider a common approach to governance.
Historically, corporate governance has evolved in response to corporate failures: the Cadbury Report in 1992 emerged in the wake of various corporate scandals; The Committee for Standards in Public Life (CSPL) in 1994 followed the cash-for-questions scandal. Most recently, we’ve had the Legg Report in response to the MP expenses scandal.
While action on corporate governance has been mostly reactive, regulators do place a high value on it. Speaking at the beginning of a consultation on corporate governance in the pensions industry, an FSA spokesperson said: “Our experience shows that once a firm gets its corporate governance right, with a strong and effective board, everything else flows from that.”
Each review of corporate governance has achieved one thing: it has proved that corporate governance reforms are incredibly tricky to implement. For example, the CSPL produced its first report in 1995 (then it was headed by Lord Nolan), which outlined seven behavioural standards for those in public life. These were: selflessness, integrity, objectivity, accountability, openness, honesty and leadership. These standards are so bland that it is almost impossible to expect anybody to understand exactly what is expected from them.
It is necessary to bring clarity and clear away muddled interpretation. Now is the time to revisit these seven principles, to make them equally applicable and understandable to the public and private sectors, as well as useful for the general public. There is plenty of common ground between the public and private sectors from which common and clear standards of corporate governance can be built.
The challenge will be to design a set of ethical standards that are accepted by both sectors. Typically, the balance of attention on corporate governance has been in having the right systems and processes in place. The softer factors of standards of behaviour and organisation culture have not been given the prominence they deserve. Yet research shows that most corporate failures and the abuse of power are underpinned by poor standards of behaviour and/or corruption.
It is the focus on ensuring ethical behaviour from the start – as opposed to focusing on systems to punish unethical behaviour after the event – that should be most important.
There needs to be a sustained effort by government, academics, regulators, and the professionals – including accountants and CFOs – to design a more cohesive approach to governance that suits both sectors. This includes a renewed focus on defining, standardising, and clarifying the behaviour expected of those in both public and private sector, though this should not come at the expense of attention on the firm enforcement of regulations.
It’s no mean feat, but there can be no harm at all in taking on the challenge.
Gillian Fawcett is head of public sector at ACCA