For years, Conrad Black’s view that an interest in good corporate governance was a “fad” was all too prevalent among companies and investors. Thankfully, this position has steadily been replaced by a recognition that good governance isn’t a cosmetic measure, but actually constitutes a competitive advantage.

At company level, strong governance can improve efficiency, mitigate risks and drive performance.

Irrespective of the commercial motivations—compelling though they are—companies are also coming under increasing pressure from politicians and regulators, whether on executive pay or issues surrounding M&A, meaning that no board can afford to disregard developments in corporate governance.

And to pile on further reasons to forsake denial, the media is increasingly likely to seize on business failures, and draw damaging connections to the inner workings of the board.

Shift of focus on corporate governance

Unfortunately, this perspective can cast governance in a negative light—as a risk or a target of regulation—rather than as a way of thinking about how company behaviours can be optimised. To avoid this danger, we at the Institute of Directors are shifting the focus in order to concentrate on giving companies a deeper understanding of how their boards operate. At the heart of our approach is the belief that the debate should be led by practitioners, not regulators.

This is crucial because politicians and the public only find out about governance problems when things have already seriously deteriorated. For example, underlying issues at Sports Direct linked to the dominant ownership of Mike Ashley were ignored for years (including by investors) because the firm was performing well.

And, as a former director of ENRC (Eurasian Natural Resources Corporation)—the cause célèbre of FTSE100 bad governance—I know this only too well. There, the minority to which I belonged was summarily fired, having lost the argument for adherence to the UK corporate governance principles. The resulting public washing of the company’s dirty linen led to a spectacular loss of stakeholder value and subsequent delisting. 

More than ticking boxes

It is a matter of fact that only those actually around the board table are in a position to identify problems early. But to discharge their responsibility to act, directors must appreciate that good governance entails far more than ticking boxes.

The competitive impact of corporate governance extends far beyond individual companies, to the markets and the countries within which they operate. International business is attracted to the City of London because the UK’s corporate governance regime is both world-renowned and globally replicated.

As we look beyond May 2019, our reputation as a place to do business freely and fairly will be a vital foundation of our continuing economic strength.

The UK must therefore tread very carefully when regulatory changes are proposed—especially if they risk raising red flags about their governance implications. A case in point is the Financial Conduct Authority’s recent suggestion to create a new “premium” listing category for companies with a sovereign controlling shareholder.

This is wholly understandable in terms of attracting business to London, but it raises a raft of concerns about maintaining the UK’s precious commitment to the highest standards of corporate governance, including protecting the interests of minority shareholders.

Governance and competitiveness

Independent of which way the argument is resolved, the Saudi Aramco IPO question shows how important governance questions are to the future competitiveness of our economy, and reinforces the IoD’s determination to give boards the tools to strengthen their effectiveness.

Now in its third year, the IoD’s review of corporate governance at the UK’s largest companies combines a set of 47 objective indicators to produce a score, which is weighted according to the views of hundreds of practitioners. The results provide a league table for public consumption and a confidential per-company health check.

We hope that the encouragement of public discussion and the precision of private contemplation will help boards to examine and optimise their performance.

The UK’s evolution of what constitutes good corporate governance, which began with the Cadbury Report 25 years ago, continues in earnest. What is important now is that the refinement of the system continues, to ensure it is fit for the business environment of today.   

The passage of time has proven Conrad Black completely wrong. In business, as in any other sport, how you play the game is as important as winning, as measured by profitability and share price.

Ken Olisa is deputy chairman of the Institute of Directors.