Why it is Time to Say Goodnight to the UK Corporate Governance Code

The Cadbury Committee’s trailblazing 1992 Code of Best Practice has had a profound impact on corporate governance over the past three decades.  Governance codes have proliferated throughout the world and a code has remained a centrepiece of UK corporate governance.  A self-regulatory dimension has featured prominently, with companies being given scope to ‘comply-or-explain’ rather than simply adhere to what is now known as the UK Corporate Governance Code.

We argue in a recent working paper that it is time for a change.  The UK Corporate Governance Code should be abolished, bringing an end the UK’s thirty-year experiment with Code-based corporate governance. 

The UK Corporate Governance Code suffers from various shortcomings that justify abolition.  First, the Code is irrelevant in material respects.  Many Code measures duplicate requirements regulatorily mandated elsewhere, particularly in relation to boardroom audit committees and executive pay.  Others constitute meaningless platitudes that affirm widely-accepted ideas.  For instance, ‘(a)ll directors must act with integrity’ (Principle B) and boards ‘should ensure that the necessary resources are in place’ (Principle C).  Sure, but does such corporate common sense need to be reduced to code form? 

Second, the costs to companies of being subject to the Code have increased, making it much more likely that these exceed benefits the Code theoretically offers.  The 1992 Cadbury Code came in at less than 750 words.  Based on word count, its present-day counterpart offers nearly five time as much governance guidance to digest.  Furthermore, although the scope offered to opt out of provisions on a comply-or-explain basis has been a Code hallmark, expectations of compliance have become substantial.  Companies have long faced investor ‘box-ticking’, which has pushed them toward adherence to the Code.  Recently, the Financial Reporting Council (FRC), which oversees the Code, has emphasized when describing justifiable explanations for non-compliance that deviations from the Code should be temporary.  Costs for those companies for which the Code’s recommendations are ill-suited have correspondingly increased.  Abolition of the Code would do much to correct matters. 

Third, and finally, the UK Corporate Governance Code has increasingly taken on a misguided stakeholder focus.  This verdict stands regardless of the merits in the abstract of factoring in stakeholder considerations as part of corporate governance.  The Code, by its very nature, is an unsatisfactory stakeholder protection mechanism.  The Code is underpinned by a feedback loop where shareholders are poised to intervene if they deem justifications for Code deviations to be unsatisfactory.  There is only so far that shareholders will go in promoting non-shareholder stakeholder interests, with most investors understandably treating the maximization of risk-adjusted shareholder returns as their main priority. 

The problem is compounded because the Code potentially allows policymakers to pass the buck with impunity with challenging governance issues.  It will be sorely tempting for policymakers to duck hard policy choices when they know UK CGC reforms can be cited to say ‘something is being done’.  Certainly, for civil servants saddled with Theresa May’s 2016 commitment to put workers on boards, the FRC’s acceptance of the UK Government’s 2017 invitation to amend the UK Corporate Governance Code in a stakeholder-friendly manner served as a helpful policy ‘get out of jail free’ card.  Abolishing the Code will preclude this sort of policymaking end run. 

We do not press in our working paper a case in favour of full deregulation.  Instead, we recommend that companies should be required to disclose under the Financial Conduct Authority’s Listing Rules corporate governance arrangements of a particularly high priority to shareholders.  While companies would correspondingly still face governance-related disclosure costs, terminating Code-driven box-ticking would give companies considerably more scope to adopt individually tailored governance arrangements than they have at present. 

The abolition of the UK Corporate Governance Code also could have significant market-wide benefits.  As we discuss in a recent post, concerns about the decline of the UK stock market have been acute enough to foster changes to the Listing Rules designed to foster initial public offerings of shares.  Other reforms, such as a rewriting of prospectus rules and the collapsing of the current premium and standard listings regime into a single segment system, are on the agenda.  Over-governance has been cited as a key reason why UK companies would prefer not to be publicly traded.  Abolition of the UK Corporate Governance Code would attack this pattern head on, and thus might help to restore the publicly traded company to the status it held three decades ago. 

The Cadbury Committee’s introduction of the code concept to UK corporate governance was an innovative step that may well have been right for that time.  After three decades, however, it is time to say thank-you and goodnight to code-based governance in the United Kingdom.

Brian R Cheffins is S.J. Berwin Professor of Corporate Law, University of Cambridge.

Bobby V Reddy is Assistant Professor, Faculty of Law, University of Cambridge.