Key Drivers of 'Good' Corporate Governance and the Appropriateness of UK Policy Responses: Final Report to the Department of Trade and Industry
Posted: 7 Feb 2007
Date Written: January 2007
Since the early 1990s, the UK has been very active in undertaking policy reforms that includes a number of corporate governance codes, expert reports, a high level review of company law, and new regulations and legislation. These policy initiatives need to be monitored and evaluated in terms oftheir success in influencing the key drivers of 'good' corporate governance. This Report undertaken for the DTI has several aims: to identify key drivers of good corporate governance based on a review of social science literature; to describe the content of UK regulatory initiatives with regard to those drivers; and to evaluate gaps in the content and implementation of UK policy regarding corporate governance, using those drivers as benchmarks. In addition, some further implications of this study are discussed for future policy and research on UK corporate governance.
The Report defines 'good' corporate governance with regard to the rights and responsibilities of company stakeholders, and the wealth-creating and wealth-protecting functions of corporate governance within this context. Based on this definition, a detailed review of the theoretical and empirical social science literature on corporate governance was undertaken across seven broad areas: boards of directors, shareholder activism, information disclosure, auditing and internal controls, executive pay, the market for corporate control, and stakeholders. The result was the identification of 18 key 'drivers' or governance mechanisms, which promote 'good' corporate governance. Key gaps in the UK regulatory framework are then explored with reference to the drivers of good corporate governance. A comprehensive review was undertaken to evaluate corporate governance related developments in UK regulation since 1990. Several potential gaps in coverage were identified in the areas of executive pay and employees stakeholders. A number of potential gaps in effectiveness were also identified with regard to other key drivers such as boards, shareholder involvement, information disclosure, auditing, and the market for corporate control.
The Report also emphasises that the effectiveness of corporate governance regulation depends very much on balancing different governance demands and regulatory trade-offs. Corporate governance is shaped by a number of contingencies, complementarities, and costs. Various organisational contingencies may place different demands on corporate governance drivers, and their implementation is also associated with different sorts of costs. Looking more generally, different drivers may act as complements or substitutes for one another. Better appreciation of such interdependencies is crucial to formulating a coherent regulatory strategy and balancing important regulatory trade-offs between the following - mandatory regulation (uniform requirements) and more flexible forms of soft-law such as codes based on comply-or-explain principles and self-regulatory norms of professional groups.
Keywords: Corporate Governance
JEL Classification: G30, G34
Suggested Citation: Suggested Citation