ABSTRACT
We have reviewed and assessed the progress of corporate governance to date and recognised that it has been driven by a series of scandals which have unnerved investors and raised their expectations of return to cover perceived risk. The Cadbury Report was aimed at investors in the City of London and largely focused on reducing financial risks. The use of codes to guide corporate governance has placed great emphasis on reliable systems, with checks and controls to maintain their consistency. Codes are basically instruments for self-regulation, to avoid the stringency and cost of legally enforced rules, but rely on openness and cooperation to be effective. The effectiveness of corporate governance is primarily judged by investors, who need a mechanism to assert control over the managements who drive their business. This agency problem has continued ever since ownership and management became divided from the nineteenth century onwards. Even family companies often have an agency problem. The basic criterion for owners to use in judging the effectiveness of managers is the sustainable profitability of the company, not the observation of codes. Many scandals have in recent years involved companies with apparently exemplary corporate governance systems (Enron, Parmalat, etc.) but unable to sustain consistent profitability. The recent banking crisis occurred despite the Turnbull Report and requirements to report on risk management. The large investments made in compliance departments did not prevent the rush to maximise profits and downplay risks. It would seem that focusing on systems is insufficient to ensure effective corporate governance; the spotlight needs to fall on human behaviours.
