Two successes from the pandemic have been the ‘Recovery’ treatment trials and new vaccines. Medical experts suggested possible options, tested each in blind trials, with the most successful treatments (such as dexamethasone) identified and rolled out globally, and changes made with real-life experience. Millions of lives are being saved thanks to evidence-based medicine.
Fortunately, the medical profession didn’t commission inquiries to find solutions run by pharmaceutical CEOs and top hospital administrators, and then roll-out their unproven ideas nationally without any testing or checks that they work.
But this is exactly how corporate governance regulation happens. A White Paper, ‘Restoring trust in audit and corporate governance’, is out for consultation until 8 July, collecting the ‘best’ bits from the BEIS Select Committee, Kingman, and Brydon Reports. These reports were themselves compiled by the ‘great and the good’ talking to each other without gathering much hard evidence.
Despite being commissioned in the wake of the 2018 Carillion collapse, the Brydon Report refers to it only three times, without ever mentioning reasons for the collapse. The introduction relies on the Guardian blaming the auditors. The 2019 Patisserie Valerie scandal gets only one mention, also to the same Guardian article. The Kingman Report says that: “Part of the genesis of this Review was a concern in some quarters that a more effective FRC could do more to avert major corporate collapses, such as that of Carillion plc… The Review was not asked to conduct, and has not conducted, any post-mortem into the Carillion collapse. Nevertheless, it has very carefully considered the wider question.” How could the wider question have been carefully considered without any reflection on actual events?
Despite many reports on corporate governance since Cadbury in 1992, and eight Corporate Governance Codes, major company scandals are still happening. Media and politicians fume over corporate failures, but no-one commissions detailed impartial inquiries to find out what really happened. It’s easier to call in a few interested parties, publicly beat the directors up and make a few grandstanding recommendations. I saw this first-hand with the Treasury Select Committee inquiry into Northern Rock, which wasn’t bad as a basic summary of events, but it didn’t get close to the root causes of the collapse (I joined the Northern Rock board just after the run on the bank).
We still don’t really know why businesses have failed; misdeeds, market forces, strategic mistakes, botched execution or simply bad luck? How can you address problems if you don’t fully understand them first?
The White Paper relies on hearsay: ‘There is a widespread perception that the quality, accuracy and reliability of corporate information is not consistently high enough…’; ‘it is felt that auditors too often fail to spot reporting problems’. Other people’s views do not constitute evidence.
Why doesn’t business complain that the hotchpotch of pet ideas in the White Paper doesn’t constitute a thorough thoughtful analysis of issues and remedies? Most, especially auditors, are just relieved that it could have been much worse. Business is on the back foot on corporate scandals, so needs to be positive. One leading audit committee chair summed it up: Some of the proposals are harmless, and most could be handled, but I don’t think they will achieve very much.
Will the White Paper improve corporate governance? Past track record suggests not, but no-one knows. The government plans legislation, without any pilot, test, or phased roll-out, and no evidence that this would have averted past corporate scandals. The impact assessment runs to 210 pages, giving additional costs of around £4bn. And what is the government’s calculation of the benefits of all these proposals? Nil: “No benefits monetised”.
Is this the way to make Britain’s corporate governance the envy of the world? Why is evidence-based governance policy just a pipedream? How about collecting data and then following it?