UK corporate governance code should go, says expert

The UK Corporate Governance Code – an international benchmark for over two decades – should be abolished, a Cambridge academic has suggested.

In an opinion piece for the Financial Times, professor of corporate law at the university Brian Cheffins has said that despite the code’s dominance, authorities should confine it to the history books for the following reasons:

• Much of it is irrelevant
• ‘Comply or explain’ doesn’t work
• It doesn’t encourage protection for stakeholders
• Policymakers don’t engage

“Despite years of research, there is no definitive evidence that “better’ corporate governance yields better corporate performance,” he wrote in a scathing review of the system that has been in place in the UK since 1998. 

“Given this, various problematic features of the existing code collectively justify abolition.”

The news comes at a landmark moment for UK corporate governance regulation. The organisation overseeing the code – the Financial Reporting Council (FRC) – will soon be replaced by a new regulator known as the Audit, Reporting and Governance Authority (ARGA). 

Proponents within the British government have described ARGA as a more powerful body with an expanded mandate. It should be fully operational sometime in 2023 and take ownership of the code going forward, conducting reviews and making edits where necessary. 

But Cheffins has called for a “wholly different parting gift” as the FRC passes into history: that it takes the code with it. 

Chiffins suggested that the code does not protect company stakeholders

Chiffins took issue with what he saw as the code’s irrelevance. In other words, other legislation or long-established conventions already cover some of the essential requirements it sets out for companies. 

“Non-executive directors should have sufficient time to meet their board responsibilities,” he quoted from the code. “This is corporate governance 101: does it need to be codified?”

Chiffins also criticised the long-established mantra of “comply or explain” – the rule that if a company does not follow a part of the code, it needs to put the reasons why in writing. But this practice has been reduced to box-ticking, he said, that leaves little room for meaningful progress. 

Elsewhere, Chiffins suggested that the code does not protect company stakeholders (i.e. anyone with interest in a company, including its workforce and its customers) against the interest of shareholders.

According to the code, the shareholders must flag if something is wrong and ask for change, but they will not always use this power in the interest of the broader pool of stakeholders. 

Lastly, Chiffins also criticised what he saw as a lack of engagement from UK lawmakers, who are ultimately too vague in what they require from British businesses. 

Even if there is a shift in power after the next British election, the code will remain

No, despite the noise. 

As much as Chiffins’ criticism might highlight flaws in how the UK regulates its markets, British lawmakers have long indicated that such flaws are no reason for abolition, merely reform. 

The current government is moving ahead with plans to set up ARGA and is entirely behind the move as a way to reinforce national oversight of corporations. 

In 2021, British Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng praised his administration’s plan to “strengthen the UK’s audit and corporate governance framework” to encourage economic confidence.

The main opposition party in the UK – Labour – has published a policy document outlining plans to “amend” the code and other legislation, not “abolish”, indicating that even if there is a shift in power after the next British election, the code will remain. 

He wants to bring the UK back to a culture of “self-regulation” in equity markets

Ultimately, the question is one of reform vs removal. Those in power in Britain favour the former at present, but there remains criticism from experts about the usefulness of such heavy government influence. 

Chiffins has said that “concise, governance-related disclosure requirements” would be sufficient to replace the code and bring the UK back to a culture of “self-regulation” in equity markets. 

How much support this argument gets in the years ahead will be something to watch closely.