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ICAEW: new corporate governance approach needed in today’s business world

imageAPRIL 2015

ICAEW has called for organisations to improve corporate governance policies and practices in order to tackle the challenges of today’s business environment. In a speech this week to the Dubai Global Convention on Leadership for Business Excellence and Innovation, the Institute’s Deputy President, Andrew Ratcliffe, expressed to government officials and business leaders that companies should rethink how they behave if they want long-term success.

Organised by the Institute of Directors India, the Dubai Global Convention brought together eminent thinkers, business leaders, policy-makers and academics from around the world to discuss how 21st century organisations should develop through innovation, creativity and excellence.

ICAEW says questioning the established wisdom on corporate governance is vital for any discussion on how businesses should operate today.

“Existing models, which have boards of listed companies acting as agents of absent equity owners, are now being challenged by the changing nature of today’s capital markets. We need to think differently about how we approach corporate governance,” said Ratcliffe.

This challenge is the focus of a new ICAEW project in which the fundamentals of corporate governance are being examined by a group of practitioners, experts and academics. So far the group has been addressing five big questions, which were discussed at the convention.

1. When is ‘comply or explain’ the right approach?
‘Comply or explain’ (where companies either follow guidelines or explain why they do not need to) can bind companies to the principles of a corporate governance code while allowing them to depart from specific provisions. ICAEW believes it promotes innovation, proportionality, substance over form and long-term learning. However, it depends on shared values of good governance and supportive institutional arrangements. When these are lacking and comply or explain does not work as intended, the situation may call for alternatives, including regulatory intervention.

2. Who should be covered by codes?
Everyone involved in corporate governance should be covered by a code that sets a framework for their involvement. This framework code should provide a context for developing other, supporting, codes. These can set expectations for the behaviour of groups whose actions are fundamental to good corporate governance.

According to Ratcliffe, this combination of framework and supporting codes will allow the development of group-specific codes without those codes creating confusion and complexity. It would enhance the shared beliefs and institutional arrangements on which principles-based codes depend. It would also enable people outside the system to hold those inside to account and will highlight the importance of shared responsibility for governance outcomes.

3. What should companies be responsible for?
In light of challenges highlighted since the onset of the global financial crisis, a company that is sensitive to the full range of its responsibilities can be more agile in adapting to the environments where it does business. It should be better at anticipating and even eliminating potential expectation gaps. Addressing the full range of responsibilities will also provide companies with a solid foundation for building and maintaining trust, while also allowing legislators and regulators to focus on developing laws relevant and proportionate to specific needs.

4. How diverse should boards be?
Corporate governance thinking has historically focussed on the need for an appropriate balance between executive and non-executives and to ensure that boards have the skills, experience, independence and knowledge of the business to enable them to operate effectively. However, increasingly both companies and society are starting to look at how diverse a board should be in order to get away from the dangers of ‘groupthink’. Boards operate best when their members do not all look the same.

5. What are the overarching principles of corporate governance?
ICAEW proposes principles of leadership, capability, accountability, sustainability and integrity. These serve to remind boards and their stakeholders what corporate governance should look like if a company is to achieve its business purpose and fundamental responsibilities. The overarching principles should also help companies and regulators respond to new challenges and maintain stakeholder confidence in business.

ICAEW is currently working on setting out key principles to support its corporate governance research, and has called for more participation from the global business community via its website – icaew.com/newchallenges.

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