For nearly 30 years, corporate governance in the UKâand in the many countries that followed its leadâhas been defined in terms of a code of conduct. It was a project conceived in a crisis and then gestated through long processes of consultation, drafting, more consultation, further drafting. It was an effort that engaged the sceptical, confronted the hostile, and eventually won over a large body of believers, many who have invested time, talent, and faith in both the code and the process through which it was created.
The decision to codify what constitutes good, or even best, practice in corporate governance is frequently seen as a masterstroke of regulatory genius. Though its authors could not have anticipated it at the outset, this voluntary arrangementâwith very little punishment possible for non-complianceâhas all but extinguished pressure for what might have been the alternative: a regime of regulation with tough civil or criminal sanctions. But that does not mean that all is well.
Veldman and Willmott (2016), for example, warn of the limits of soft regulation, like codes. What they call the âreflexive governanceâ of codes and comply or explain âpromises to forestall potential pathologies and crises that threaten confidence in corporate governance, and so bestows upon the Code a degree of credibility and legitimacyâ. At the same time, however, it âsupports a particular, financialized political economy where the claims of wider constituencies are marginalized or even excludedâ (Veldman & Willmott, 2016, p. 583). Their observations highlight a central problem in corporate governance and codes, however. As we shall explore, if the freedom of explanation as a means of compliance leads to reflexive, double-loop learning then it holds the promise of innovative and even transformative governance. If it degenerates into surface compliance and embeds power relationships, it can squeeze out other voices, lose insights that mayvan benefit the company, and in time sap the legitimacy of the code and the corporation. The alternativeâhard regulation, with legal enforcement to ensure those âwider constituenciesâ share powerârisks creating a regime that lacks flexibility to respond to changing contexts.
This was a code fashioned for a particular crisis, in a particular country, at a particular stage in the evolution of its capital markets, and at particularly febrile moment in the politics of Britain. Yet that codeâinitially named The Cadbury Code, after its principal author, the late Sir Adrian Cadburyâhas been widely imitated across geographies, institutional systems, and market contexts. The principles it established have found their way into codes written for other organisational types as well. Charities, trade associations, neighbourhood committees, government departments, and even parliament itself have copied its key recommendations, sometimes verbatim. Those recommendations thus inform what are often labelled as âcorporate governance reportsâ by entities that have nothing else in common with the world of corporations, listed on stock exchanges, with diverse and dispersed shareholders, the world for which the code was designed.
Moreover, the process of its development has come to have many imitators. It came about through a temporary body, established outside government, without statutory grounding, with no power to compel participation in its fact-gathering. That unofficial, non-governmental rule-making body nonetheless gained legitimacy, and not just among those directly affected, but in the broader public as well. The Cadbury Committee held consultations, informal and formal, filtering ideas through a draft and then modifying the draft, and then building a timetable for reviewing the âfinalâ version two years later, and then roughly two years after that. The cycle of opportunities for revisions arose through custom and practice, not a stipulation of an expiry date, and it has persisted through nearly 30 years of practice. This winnowing and filtering and revisiting makes it a living document, constantly open to revision, a standard in perpetual motion that nonetheless provides an anchor to the way corporate governance works.
The language of the code and the discourse it created have evolved over time in ways that suggest that its various authors are not complacent (Nordberg & McNulty, 2013), but its core principles are remarkably unchanged. According to Price, Harvey, Maclean, and Campbell (2018, p. 1557) that stability shows the code âis institutionally embedded and subject to institutional stasisâ.
The original code (Cadbury, 1992) developed in response to a series of corporate failures, and its major revisions in 2003 and 2010 were motivated by similar and arguably more systemic problems in corporate governance. Indeed, the global financial crisis of 2007â2009 nearly paralysed the worldâs financial system and triggered a recession of a scale not seen since the 1930s. The UK was especially hard-hit, seeing its first run on a bank since the mid-nineteenth Century.1 That bank was nationalised; and as the crisis spread around the world, Britain was forced to part-nationalise two much larger banks, one of which had claimed the distinction of being the worldâs largest.
The UK code has focused attention on improving board effectiveness, and it clearly succeeded in getting boards to work harder. The time commitment that directors make has expanded. Board committees meet more frequently, and board papers are generally more detailed. Remuneration of non-executive directors has grown too. Direct data on this is hard to come by across the time since the Cadbury Code, as reporting requirements came into place only towards the end of the 1990s. However, one study showed that during a period of modest inflation in the economy, from just before Enron imploded in 2001 to just after the worst of the post-financial crisis recession had passed, director fees for listed UK companies roughly doubled (Goh & Gupta, 2016). It also demonstrated, against the grain of âtougherâ governance, that fees increased more for well-connected non-executive directors, those with wide personal networks among directors of other companies, and rather less for those with characteristics that might lead them to hold management to account.
But if the ambition of codes of corporate governance is to forestall corporate collapse, how did the codeâthrough repeated consultations and reformulation, over two decadesâfail to seek out other solutions, even as experiments? Why havenât we seen more vigorous interventionsâin law and regulationâwith greater compulsion, to compensate for the deficiency of what is, in effect, a voluntary code? These questions resonate in fields of public and organisational policy well beyond corporate governance.
This study examines the first question through analysis of the discourse developed as the code was being created and how its major revisions were conducted. That analysis considers the economic and political context in which the code developed, as well as the language in which the debate was conducted and the resulting discourse it created. It addresses the second through context-driven interpretation of those findings, which then leads to unanswered questions that provide a direction for future research in corporate governance and other fields. It does so by considering the process through which the code became institutionalised and then came to be taken for granted as âgoodâ (Hodge, 2017), or even âbestâ (Seidl, Sanderson, & Roberts, 2013) practice.
Many of the codeâs provisions won over hearts and minds quickly, conforming to common sense and confirming existing custom and practice at many listed companies. Boards are responsible for the business. They should challenge management. That means they need in general to be independent of management, though the definition of independence might be difficult to discern from the outside. Directors should be conscientious, paying close attention to the information they receive. To do justice to the big issues, the code specified that certain tasks should be delegated in the first instance to committeesâremuneration, audit, and nominating new directors, including importantly the ch...
