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Comply or delay

The UK’s ‘comply or explain’ model has successfully promoted best-in-class governance by setting aspirations rather than rules, but is not delivering gender-balanced boardrooms

When reading the European Commission’s consultation on gender imbalance in corporate boards in the EU, I almost expected the question, ‘Have you stopped beating your wife?’ to be levelled at male directors.

Viviane Reding, the Commission’s vice-president and justice commissioner, clearly thinks the case for more women at the top is inarguable and that progress to address the imbalance has been too slow. So consultation question 2, ‘What additional action… should be taken to address the issue,’ is obviously a leading one. Note the underscore – who would dare answer ‘none’?

Although further self-regulatory moves have not been ruled out, Reding said in launching the consultation: ‘I regret to see that despite our calls, self-regulation so far has not brought about satisfactory results.’ She is ‘not a great fan of quotas.
However, I like the results.’ France wins the EU prize for kick-starting progress by going for quotas of 20% by 2014 and 40% by 2017. Norway blazed the 40% trail in the mid-2000s.

There are a number of unsettling issues here. First, I share Reding’s impatience on this one, but I have long supported the UK’s approach of nudging business to reform itself through codes of best practice under the discipline of ‘comply or explain’.

Second, I would love to be sure that companies with more women on their boards do better. But, while evidence is mounting, it could still be coincidental with the rise of sectors that are more female-friendly. France may have been in the vanguard on this issue in the past couple of years, but the CAC 40 has been a relatively poor performer since the start of 2010.

Third, it is difficult to draw the line between legislation and guidance in attempts to reform behaviour that is not criminal. The intersection between public policy and commercial freedom to operate with a minimum of political interference is particularly fraught. This is especially so when the stock-market voting machine – price – is capable of discounting for weak governance.

So where should the line be drawn between hard legislation and softer codes or self-regulation? In the wake of the financial crisis, the latter approach has been challenged. After looking into what constitutes an explanation under comply or explain, the UK’s Financial Reporting Council (FRC) found that ‘explanations are indeed sometimes rather perfunctory’.

In its attempt to harden up the monitoring process, the FRC brought investors and companies together to debate what constitutes a meaningful explanation. The painfully obvious elements included that the company ‘should give a convincing rationale for the action it was taking’. While this brings home the importance of the Stewardship Code, which aims to improve investor engagement, it still
sounds soft from the Reding viewpoint.

One of the best arguments for codes backed by comply or explain is that a higher ‘aspirational’ goal can be set than in a hard rule, which provides a minimum standard. This is how the UK has led the way in corporate governance over the past 20 years. It continues to do so on the election of directors and the independence and reporting of audit committees. But it is indeed soft to suggest that Lord Davies’s 25% target for women directors is aspirational, or to allow a comply-or-explain let-off for companies that fail to retender an audit within 10 years.

Of course the EU can be criticised for being trigger-happy in making hard rules. But if the UK wants to defend comply or explain, which has often served it well, two things need to happen: investors must show they
can police it effectively, and regulators should ensure that desirable reforms happen at a decent pace.

Jane Fuller is former financial editor of the Financial Times andco-director of the Centre for the Study of Financial Innovation thinktank

This article was first published in Accounting and Business magazine - UK edition, May 2012


Published: 5 Aug 2012