Curbs on bosses risk going too far

BUSINESS in the UK has achieved a unique blend of corporate governance and entrepreneurship. And what's more, it works.

We had our problems back in the 1980s with scandals such as Robert Maxwell and Polly Peck.

Despite more recent corporate failures elsewhere in the world, the truth is that your money is more safely invested here in the UK than almost anywhere else.

That doesn't mean that our companies always succeed. They don't. Every aspect of life involves risk and business is no exception.

Democratic capitalism means that there will always be winners and - sadly - losers. The reality is that fallible people like you and me run companies and sometimes they get it wrong. When they do, there are consequences.

That's why there needs to be safeguards - which the new combined code on corporate governance amply provides.

We must get the balance right. No one wants company board meetings totally taken up with endless discussions on compliance.

Corporate governance is important, but boards are there to make the key decisions that will ensure the wealth and job-creating future of the business.

If they are forced to take their eye off the ball and to become boardroom bureaucrats, we might as well pack up shop.

German boardrooms are full of administrators. It's ingrained in their system - and look at the problems that corporate Germany is facing.

The independent voices of non-executive directors need to be strengthened. Derek Higgs, who produced a report into corporate governance last year, has done much to help.

But non-executives are neither paid enough nor expected to be involved enough to become policemen.

Making them responsible for everything that goes wrong isn't smart either, as no one will be prepared to take the role on.

That it will do nothing to encourage diversity in the boardroom.

The major plank of the Higgs Report, which the government commissioned after the Enron disaster in the US, was 'comply or explain'. It is a flexible, rather than a one-size-fits-all approach that recognises that different circumstances often need a different type of solution.

Companies, for their part, have to provide shareholders with an acceptable explanation of their decision.

The practical difficulty comes when fund managers accept the decision, but at the voting stage in the run-up to the agm, anonymous voices publicly attack it. Then the proxy card comes in voting against. Comply or explain suddenly becomes comply or else!

Investment houses need to improve the level of communication between the people actually managing money and those lower down the organisation who check that companies are complying with governance rules.

Joined-up fund management is simply a must if this is to work.

You might find it amazing that this is not the norm in 21st century UK fund management, but it isn't.

Business also has to play its part and must get its communications right. This is the New World of corporate governance where shareholders at all levels take an active interest in what companies are working to achieve and there's nothing wrong with that.

No chairman or chief executive should complain about constructive involvement. We have waited a long time for it to come. But we both have to talk to each other to explain our actions and we must make time available to do it properly.

With transparency and good, timely communications, the combined code will work and this will give investors greater confidence.

But surely no fund manager can insist on standards of governance in companies that do not apply to itself. Both sides need to set an example.

We can't let the refrain from transient shareholders of 'I'm only in this for the short term' undermine the promise for those who commit for the long haul.

Dynamism is one thing. Selfish indifference is quite another. Here-today-and-gone-tomorrow shareholders can only expect a commitment to better communications if it is a two-way street.

Digby Jones is director-general of the CBI