Scenarios for Corporate Governance in 2030

What is corporate governance?
The 2003 Higgs Report defines corporate governance thus:

• ‘Corporate governance provides an architecture of accountability – the structures and processes to ensure companies are managed in the interests of their owners’. This is an accountant’s approach to governance, which is widened by the ‘inclusive’ scope of Tomorrow’s Company:

• ‘Companies would need to build relationships with communities and government to underpin their licence to operate’. This approach has developed into ‘corporate social responsibility’.

All definitions of corporate governance from Cadbury onwards have failed to focus on the human factor. Failures of governance are mainly due to the difficulties of allocating power and controlling human behaviour.

Why does corporate governance matter?
The recent destruction of wealth and employment caused by ‘excessive exuberance’ shows the effects of a failure of governance, both by companies and by governments and regulators. Effective corporate governance counters excesses and hidden agendas in the system, and helps to sustain wealth and employment into the future. Companies with effective governance have a competitive advantage over those, like Enron, which only have the illusion of governance.

History of corporate governance
Corporate governance emerged as a movement out of the scandals of the ‘70s and ‘80s involving organisations such as Maxwell’s empire, BCCI, British and Commonwealth, etc. The Stock Exchange invited Sir Adrian Cadbury to examine the financial aspects of City regulation and to recommend how to avoid major systemic abuse in the future. The Cadbury Report, and the Code of Practice developed from it, started a process of enquiry which focussed on directors’ remuneration (Greenbury), was consolidated (Hampel), extended to include risk management (Turnbull), non-executive directors (Higgs) and audit (Smith). The current Combined Code, overseen by the Financial Reporting Council (FRC) is presently undergoing an extensive review to update it and align it with international best practice.

Key issues of corporate governance include:-

• Defining the purpose and strategy of the company

• Prioritising short term and long term strategies

• Creating, developing and managing the board

• Managing power and avoiding its concentration

• Developing rewards and sanctions to support company objectives

• Building and sustaining a strong company reputation

• Developing and implementing strong policies to counter corruption and fraud in company dealings

• Recognising and engaging stakeholders

• Providing for the self-renewal of the company and it resources (especially human)

• Developing a purposeful relationship with shareholders (its owners).

Global corporate governance
Concern about corporate governance has spread to most countries which trade internationally or have foreign investors. This is raising disquiet about corruption and weak accountability, and the economic power of resource-rich countries with poor governance (Russia, Middle East , Brazil etc.) and growing economies desperate for resources (China). will undermine the Western model of globalisation and weaken the effectiveness of corporate governance in certain markets. This threat will need to be vigorously countered in company dealings. The following scenarios illustrate how these tensions may work out in the next 20 years.

‘Fragmentation’ Scenario
For many years up to 2030 I worked in the United Nations secretariat, specialising in negotiations to strengthen the structures underpinning globalisation. Moves to change the permanent member structure to reflect the new realities of power, using the G5 model (USA, China, EU, India and Japan), were promising initially but growing disharmony, and later splits in the EU made its political role unsustainable. The growth of Islam undermined the G5 model and destabilised key countries, such as Nigeria and Indonesia, and brought growing factionalism to India and key Middle Eastern countries, such as Iraq, Turkey and Egypt. Google withdrew completely from China in 2011.

Our task in the UN was hampered by the steady growth in crime worldwide, fuelled by drugs, uncontrolled migration and erosion of the rule of law. US tolerance of drugs and guns, and inability to control the borders of the USA led to ‘Mexicanisation’ and a resurgence of the Mafia (in various forms). Conflict between local gangs and pirates became uncontrollable and escalated in some cases to war, stimulating the international arms trade and damaging world commerce. In 2012 skirmishes between Iran and Israel led to sustained hostilities, involving UN intervention with Great Power support.

Another challenge faced by the UN was a series of nations failing and requiring political and economic support. Yemen followed Somalia in 2013, and contagion from Zimbabwe destabilised South Africa soon after. Religious strife compounded corruption in Nigeria, and Sudan disintegrated. Failed African states were rescued by China, nominally with a UN mandate, but largely to secure commodity supply. China was unconcerned about governance and most failed states were despotic in nature. In 2020 the World Trade Organisation (WTO) was disbanded.

This progressive fragmentation weakened international law and the trust needed to foster ongoing trade. Transactions were increasingly ad hoc and subject to risk. Governance became focussed on the short term and on protecting immediate competitive advantage. More stable countries increased their regulatory framework to police business and other transactions and increased penalties for non-compliance in order to retain some measure of control. Corporate governance moved away from principles to specific rules, which were increasingly encoded as statutes. Criminal law increasingly impinged on commercial law and litigation replaced arbitration in many instances. The weakening of corporate governance led to increased private equity and stock exchanges lost their market power. Trust was diminished in scope and clustered in ethnic, family and other related groupings. Bodies similar to the earlier friendly societies began to emerge.

This process led to increasing distrust between the USA and China in particular, as China pushed for world hegemony. Competition between them sometimes erupted as conflict but, as a democracy, the USA was obliged to avoid war (which it could not afford). China remained a Communist Party-based dictatorship, struggling to contain regional and individual aspirations, and building armed services capable of projecting power and controlling client states. By 2030 this situation was clearly becoming unstable and the ‘Chinese Empire’ began to disintegrate.

This crisis had been driven by national and other ambitions and what remained of the world order was in peril. Fortunately the structure of the UN remained operational, largely as a forum for big nations to project power, but it was available to legitimise action to defuse the crisis and negotiate face-saving formulae for recovery. A key instrument of that recovery was an amended G5, adapted to give voice to Islam, Hispanic countries and the ‘big spoiler’, Russia. The combination of the enhanced G5 and a re-invigorated UN enabled the essential role of good governance, both in government and business, to be recognised as the talisman for reliable trade and business relations. In 2040 trading patterns were sufficiently restored to enable the WTO to be re-established and its work relaunched.

‘World Federation’ Scenario
I worked for many years for HSBC Group and learned the benefits and difficulties of operating sustainably in different markets. To be ‘your local bank’ required deep understanding of societies and of their culture, imaginative adaptability and a firm framework of core values to guide consistent action and build trust.

The move of the Bank’s headquarters to China in 2009 changed it from a ‘Western’ institution into an adaptive global business, with roots in the future rather than in the past. By moving away from an OECD context the Bank was able to operate increasingly as a neutral force, while navigating through a maze of different, and sometimes, conflicting systems and beliefs. Over time it became evident that human values lived consistently to build trust were more important than local differences, although power and risks needed to be managed with constant care.

Our progress depended not only on greater human interaction but also on the growth of technology which facilitated it. The Internet moved from an English language preserve to a dynamic Tower of Babel, spawning new interactive special interest groups and liberating the interchange of information. China, Russia and other restrictive regimes were drawn into the process for fear of being marginalised, although Chinese language activity by-passed English by 2030.

The ageing of world populations, supported by medical advances, increased pressure for better pensions and higher dividends. The growth of shareholder power to elect directors directly which started in Sweden around 2000, led to greater Board responsiveness to shareholders and other stakeholders. The excessive power gained by executive directors was eroded by enhanced media activity and by increased emphasis on empowering non-executive directors, following the Higgs model. All directors became progressively subject to independent evaluation, starting with OECD countries and forcing others to comply in order to compete in increasingly open markets.

Open markets and consumer pressure raised international competition, forcing companies to maximise efficiency and driving continual innovation. These pressures drove companies to shape and protect their reputation, spreading the working of corporate governance out of the boardroom across all parts of the company and into the growing network of stakeholders and alliances on which it increasingly depended. By 2030 there remained entrenched differences between national models of corporate governance despite growing convergence, and certain groupings were coalescing around key cultural groupings including OECD, Far Eastern, Islamic, etc.

Despite this overall progress in corporate governance, political power blocked full openness and accountability in some countries, and the impact of criminality and terror ensured that corruption remained untamed in parts of the world, and that governments could interfere in corporate governance for ‘reasons of security’. By 2030 concerns about access to water, food and other key commodities strengthened the hand of less democratic governments in over-regulating their economies and the actions of their businesses.

By 2030 corporate governance had made further progress in the public and tertiary sectors. The Nolan model remained the ideal but its idealism found resistance in countries where political power was concentrated and public accountability was limited. In such countries NGO’s often offered better models of governance than the public sector. Progress in both public and tertiary sectors was driven increasingly by blogs and twittering, putting pressure on corrupt politicians and officials and spreading best practice.

Corporate governance is underpinned by the rule of law, working in a predictable and timely fashion. Inadequate process of law still hampered corporate governance in some world markets in 2030, making trade and investment risky and reinforcing established power brokers. There is sustained demand for an international framework for commercial law to match the halting progress in internationalising criminal and constitutional laws. Growth in migration put further pressure on individual societies and rewarded criminality.

The crisis of 2008/9 revealed the key weakness of corporate governance. Human greed and failure to restrain it continue to undermine the work of corporate governance. Only when we all recognise that selfishness erodes society and impoverishes us all, can corporate governance become safely embedded and flourish.

An early indicator of this scenario was the decision to make the Chinese renminbi convertible from August 2013.

Adrian Davies
5th May 2010