Attachment 2
ETHICS IN PUBLIC LIFE AND CORPORATE GOVERNANCE
IN THE UK
Prepared for the British Council by Dr
Rosamund Thomas, Director, Centre for Business and Public Sector
Ethics, Cambridge, UK, September 1998
SUMMARY
The UK approaches standards of conduct, or ethics,
in public and business life by self-regulation or voluntary codes,
rather than by statutory authority.
The Committee on Standards in Public Life (formerly
the Nolan, now the Neill Committee), set up in 1994, recommended
new codes and principles to cover the behaviour of MPs, Ministers,
civil servants and others in public life. These codes and principles,
together with institutional developments, have been implemented
to bring national government in line with changes in UK society.
The Committee went on to address local government in England,
Scotland and Wales, and its recommendations are presently being
implemented.
In 1997 the Committee moved closer to a statutory
approach to ethics by recommending a new statutory offence, `misuse
of public office', which is under consideration. In addition,
existing legislation covering criminal offences, such as the law
on corruption, is being updated.
Similarly, the UK business community has always
preferred self-regulatory codes to govern the conduct of company
directors. The Hampel Committee on Corporate Governance proposed
a code and set of principles in its 1998 Report. The City of London
and the business community have succeeded, through this report,
in retaining self-regulatory codes to govern the conduct of company
directors. If, however, the Hampel Code does not succeed in regulating
adequately the conduct of those in business, the government may
take steps to legislate for this.
Sections 1 and 2 of this document introduce
the subject of ethics in public and business life.
Section 3 deals with ethics in public life under
seven subheadings:
— codes of conduct and laws;
— institutional changes/reforms;
— audit, public accountability and
openness;
— guiding principles and motivation
to encourage good conduct;
— external and internal education and
training;
— democratic trends involving the views
of the public;
Section 4 explores corporate governance in the
UK from the Cadbury Committee to the work of the Hampel Committee.
Section 5 reviews the governance of the financial
services industry in the UK, and is followed by Section 6 which
covers professional standards of conduct.
Conclusions are drawn in Section 7.
INTRODUCTION
The question of ethics in public and business
life whether it concerns politicians and public officials or company
directors and the corporate sector, is one that has come to prominence
in recent years in the UK. The infamous "cash for questions"
case, in which certain Members of Parliament were accused of taking
payment to ask questions in the House of Commons and arguably
contributed to the heavy defeat of the Conservative administration
in 1997, is one prominent example. That issue and others were
considered by the committee which had been established in 1994
headed by the judge Lord Nolan to look into the wider issues of
standards and ethics both for elected politicians and for civil
servants and other public officials.
In the private sector corporate failures and
concerns about company directors' responsibilities led to the
setting up of the Cadbury Committee which began a review of corporate
governance. This work was added to by the later Greenbury Committee,
which looked at the "fat cats" issue of company directors
paying themselves large bonuses, and the Hampel Committee.
There are many similarities and some differences
in the way in which standards and ethics are approached in the
public and private sectors in the UK. This briefing document gives
an overview of those issues. It describes how they arose and what
steps are being taken to tackle them. The issues continue to be
debated. Amongst other things the government is now beginning
a review of legislation affecting corporate governance and other
company law issues.
This document was commissioned by the British
Council from Dr Rosamund Thomas, Director of the Centre for Business
and Public Ethics.
1. MODERN ETHICS
IN PUBLIC
LIFE: WHERE
IT BEGAN
AND WHY
In 1986, the civil services of the UK and France
were reported to be "the two best" in the European Community.
The British civil service was "very much admired" for
its objectivity, fairness and impartiality. Why, then, the emphasis
in the 1990s on a need for ethics in public life?
By the 1990s numerous changes had taken place
in the UK: the privatisation of a growing number of state functions;
the contracting-out of a range of government services; renewed
emphasis on financial efficiency; reductions in the numbers of
civil servants and the separation of executive tasks into Executive
Agencies. At the same time Parliament was under increasing pressure
from professional lobbyists, and there was a general lack of clarity
over the acceptance of gifts, hospitality and outside employment
by MPs and Ministers. Citizens, too, were becoming more aware
through the media of the public and private behaviour of their
elected representatives: the consumer-led society of 1990s Britain
was voicing opinions about standards they expected from those
in public life. A number of individual cases involving unacceptable
behaviour by Ministers and MPs led the then Prime Minister, John
Major, to set up in 1994 an independent committee to inquire into
standards in public life, chaired by a judge, Lord Nolan. After
three years and three published reports, Lord Nolan stood down
as Chairman, to be replaced in late 1997 by Lord Neill of Bladon,
QC (hence, the committee is now known as the Neill Committee).
The new Prime Minister, Tony Blair, has continued the Committee's
work; indeed, a fourth area, the funding of political parties,
is now being tackled.
2. THE UK APPROACH
TO ETHICS
IN PUBLIC
LIFE: BEFORE
AND AFTER
NOLAN
Before the 1990s, "ethics" was not
a word commonly used in the UK in the context of public life:
the term was "standards of conduct". Now, the term "ethics"
has been adopted alongside it. Traditionally, the UK has regulated
ethical behaviour, or standards of conduct, in public and business
life by reliance on self-regulatory codes as much as on the law.
The British civil service, founded on the principles of the Northcote-Trevelyan
Report of 1853, espoused the convention of political neutrality,
which was upheld by on-the-job training, and by the establishment
in 1969 of the Civil Service College, as well as by a disciplinary
code. Certain laws had existed from the turn of the century to
deal with standards of conduct in public life. Criminal laws,
for example, had been enacted to cover unauthorised disclosure
of official information—the Official Secrets Act (1911-1939)—and
offences of corruption, namely the Prevention of Corruption Acts
(1889-1916). A spate of breaches of trust during the 1980s by
British civil servants led to prosecutions under the Official
Secrets Acts for unauthorised disclosure of official information,
and in 1989 these Acts were amended.
In the 1960s and 1970s some instances of corruption
in English local government had occurred, particularly over the
awarding of contracts for public building works, which spread
to central government. A Royal Commission on Standards on Conduct
in Public Life, under the chairmanship of Lord Salmon, reported
in 1976, but its recommendations remained largely unimplemented.
The Nolan Committee on Standards in Public Life, in its First
Report of 1995, included a review of the loopholes in the UK Prevention
of Corruption Acts identified by the Salmon Committee, recommending
that the Law Commission might rationalise the law on corruption.
3. THE POSITIVE
APPROACH TO
ETHICS IN
PUBLIC LIFE:
SEVEN KEY
ELEMENTS
Ethics is the positive side of seeking to uphold
standards of conduct and behaviour in public life and relies in
its modern form upon seven key elements, as follows.
3.1 Codes of conduct and laws
Traditionally, the UK has relied upon self-regulatory
codes to govern conduct in government and business. However, moves
are in progress to modernise corruption laws, and possibly to
create a new statutory offence, "misuse of public office."
These modern developments are set out below.
Codes of conduct
(i) Central
Government
Codes of conduct have existed in the UK for
decades to set standards in public, business and professional
life. The Treasury and Civil Service Committee of the House of
Commons was well advanced in proposing changes to the Civil Service
Code when the Nolan Committee issued its First Report in 1995:
the Nolan recommendations were integrated into the new Civil Service
Code. The 1990s Code is more decentralised than before, with the
Cabinet Office setting the guidelines and departments of state
supplying the details.
In the UK, codes of conduct have been extended
throughout the government and two new ones have been introduced
post-Nolan for MPs and for Ministers, to replace old Conduct and
Procedures for Ministers Guidelines.
(ii) Local Government
At local government level in respect of elected
members or councillors the Nolan Committee (in its Report into
Standards of Conduct in Local Government, Third Report, 1997)
recommended a radical new ethical framework whereby Parliament
approves a statement of the "General Principles of Conduct
for Local Councillors'" and a "Model Code of Conduct
for Local Councillors", both prepared by local government
representatives and also approved by Parliament. The Committee
proposed that each local authority should adopt a local code of
conduct which would incorporate the general principles and achieve
the same effect as the approved model code. This would give each
local authority responsibility to adopt a code within the national
framework, which would meet local needs, and would provide consistency
in codes for local authorities.
The Committee also recommended Local Government
Tribunals in England, Scotland and Wales, each as an independent
arbiter with the power to hear appeals from councillors and to
require a local authority to alter its code of conduct when necessary.
However, since the Nolan Committee's Third Report of 1997 devolution
of certain powers to Assemblies in Scotland and Wales has been
voted with a Scotland Bill now having been prepared. Devolution
means that careful thought must now be given as to how an ethical
framework will be implemented in Scotland and Wales.
Regarding local government officials the Nolan
Committee decided against a formal framework similar to that of
local councillors. Instead, it proposed that the work done by
the Local Government Management Board and by individual local
authorities in establishing codes of conduct for officers should
be built upon. The Nolan Committee called for clear routes for
staff working within local authorities to confidentially voice
any concerns, as well as a publicised complaints system for people
who receive services from a contractor to the local authority.
Another key cause of concern identified by the
Nolan Committee in local government was the potential for improper
behaviour if the normal professional relationship between the
councillor (the elected member/politician) and officer (the official)
became unsatisfactory—to quote, "too cosy or too combative".
The Committee recommended that a formal protocol setting out the
relationship between members and officers should be adopted throughout
local government.
In April 1998 the Local Government Minister
announced a consultative paper setting out the government's plan
to introduce a national framework for codes of conduct for local
government. This document, entitled Modernising Local Government—a
New Ethical Framework—follows the Nolan Committee recommendations
for tough new standards of conduct applicable to both elected
members and officers.
Laws and proposed laws in the UK in respect of
anti-corruption and misuse of public office
(i) Updating
the offence of corruption
In response to its own and OECD initiatives,
the UK is reforming its Prevention of Corruption Acts. Britain
is well advanced amongst OECD member nations in meeting the organisation's
criteria in this respect. In 1996 the Home Office published a
consultation paper on the law relating to the bribery of MPs.
This matter is also being considered by the House of Commons (Joint)
Committee on Standards and Privileges. It is unclear, however,
whether an MP would be prosecuted under the Prevention of Corruption
Acts or disciplined under parliamentary law.
In March 1997 the Law Commission published draft
proposals in the form of a consultation paper for a modern law
on bribery which in turn follows a 1976 recommendation of the
Royal Commission on Standards in Public Life (the Salmon Commission).
In the light of modern developments such as the privatisation
of public functions, the Law Commission proposed the abolition
of the distinction between a public and private organisation but,
does not deal with the bribery of an MP, so as to avoid duplication
of effort.
In June 1997 the Home Secretary announced his
intention to take forward the Law Commission's proposals for a
new offence of corruption covering both public and private sectors
and to legislate to bring the bribery of MPs in respect of their
official parliamentary duties within the scope of statute law
once the reports of relevant Parliamentary Committees had been
considered. These proposals are deemed to be more effective against
bribery and corruption in a wider range of circumstances.
In 1998 the Law Commission published its Report
and Bill for the reform and modernisation of offences contained
in the Prevention of Corruption Acts and the common-law offence
of bribery. The proposals call for the replacement of the existing
law by a modern statute creating four new offences:
— corruptly conferring, or offering
or agreeing to confer, an advantage;
— corruptly obtaining, soliciting or
agreeing to obtain, an advantage;
— corrupt performance by an agent of
his or her function as an agent;
— receipt by an agent of a benefit
which consists of, or is derived from, an advantage which the
agent knows or believes to have been corruptly obtained. (The
term "agent" is anyone who has agreed to perform functions,
whether for another person or for the public, or both).
(ii) Proposal for a new offence: misuse
of public office
In 1997 the Nolan Committee proposed a new offence,
"misuse of public office". This would cover serious
misconduct other than bribery or corruption. The Committee did
not envisage frequent prosecutions. Nonetheless it felt it important
that such an offence should exist to fill the gap in existing
law, signal clearly the special terms on which all public offices
are held and achieve consistency across all public bodies. The
new offence would apply to Ministers and civil servants, local
government councillors and officers, the police, magistrates and
the judiciary and to non-departmental public bodies. It is even
envisaged that the offence might apply to other bodies which the
Nolan Committee considered in its Second Report—institutions
of further and higher education, and possibly fully privatised
companies such as the utilities.
This new offence develops the existing common-law
offence of "misuse in a public office," under which
prosecutions are still made. However, in its consultation paper
on corruption the Law Commission noted that this offence was "wide-ranging
and ill-defined." It involves, for example, dishonesty which
extends beyond misconduct in a public office. The proposed new
offence would give a clearer indication of the circumstances in
which an offence might occur. The Nolan Committee recommended
that consent to bring criminal proceedings under this new law
should be vested in the Director of Public Prosecutions. The only
defence against criminal proceedings should be that the office-holder
has acted in good faith.
(iii) Official Secrets Acts 1911-1989
We noted earlier that in 1989 UK Official Secrets
Acts were amended, particularly the offence relating to the unauthorised
disclosure of official information or leakage of government information.
(iv) Other laws affecting conduct and
behaviour in the public and private sectors
Company law covers the role and duties of company
directors. There is also a law relating to insider dealing. In
March 1998 the Minister for Trade and Industry announced a wide-ranging
three-year review of company law to consider whether the law on
directors' duties should be amended to take a range of stakeholder
interests into account. Many aspects of directors' duties are
embedded in good practice and the self-regulatory system of corporate
governance, namely the Hampel Committee's Voluntary Code and Principles
(set out in Section 4.5).
3.2 Institutional changes/reforms
Parliament
To be effective, codes and laws need to be properly
regulated and overseen. In the UK a new Office—that of Parliamentary
Commissioner for Standards—has been introduced at national
level. This body is separate from Parliament but co-operates with
it to advise Members of the House of Commons who have dilemmas
about procedures or conduct. Sir Gordon Downey, the first Parliamentary
Commissioner
Improved declaration and registration of Members'
interests have been devised as part of the new ethical framework
for Parliament. The Parliamentary Commissioner for Standards advises
Members of the House of Commons about any uncertainties or concerns
they may have in respect of the new procedures for declaration
and registration.
Another development at parliamentary level has
been to rename the House of Commons Privileges Committee the "Committee
on Standards and Privileges" to extend the Committee's remit
to oversee the work of the Parliamentary Commissioner for Standards.
The Committee also considers any matters relating to the conduct
of Members, including specific complaints about alleged breaches
in any code of conduct which have been drawn to its attention
by the Parliamentary Commissioner. These improvements to parliamentary
procedures have been made as a result of the Nolan Committee's
First Report of 1995 and Parliament's response to it.
Executive
Institutional changes and reforms in the Departments
of State at central government level post-Nolan include the appeal
process, whereby the Civil Service Commissioners provide the ultimate
appeal for a civil servant who has a dilemma relating to propriety
or ethical standards.
Ministers are bound by parliamentary procedures
and the revised Code for Ministers. In addition, consideration
is being given as to whether Ministers facing conflicts of interest
and other ethical dilemmas should be advised by an "Ethics
Counsellor". The role of Sir Gordon Downey might be extended.
Alternatively, a separate post of "Ethics Counsellor to Ministers'
might be created.
Local government
At local government level, the Nolan Committee
in its Third Report (1997) recommended that councils should set
up a Standards Committee, composed of senior local government
councillors, to examine allegations of misconduct by councillors
and to recommend disciplinary action. Greater clarity was needed
at local level not only in respect of local authority codes of
conduct but also in regard to the rules of registration and declaration
of interests and action to be taken by councillors when faced
with a potential conflict. If a councillor failed to abide by
these rules the Nolan Committee proposed that the Standards Committee
would be able to recommend to the full Council that the councillor
should comply or be disciplined. The government's consultation
paper Modernising Local Government proposes the setting-up of
a new independent Standards Board to investigate allegations of
malpractice and misconduct, on the lines of the Nolan Committee's
proposals.
Another key concern was abuse of the planning
process and the granting of planning permission for new buildings.
The recommendations relating to codes of conduct and conflicts
of interest at local level are considered to be of particular
importance in their application to this.
An appropriate ethical framework means devising
codes or laws which can be implemented with the resources available.
These should not be too complicated or detailed. Similarly, institutions
such as an Office of the Standards Commissioner, or committees
and/or formal procedures for whistle-blowing, need to be simple
and clear. The Nolan Committee has warned that:
— attempting to enforce good conduct
through detailed rules can itself contribute to wrongdoing, especially
if the rules are based on the presumption that people will naturally
misbehave; and
— a lack of clarity and consistency
in rules and procedures is unhelpful.
— awareness of the codes or laws needs
to be part of any ethical process.
3.3 Audit, public accountability and openness
Financial audit of central and local government
is crucial to ethical government. Indeed, so many cases of misconduct
in public and business life stem from opportunities to "get
rich quick". At central level the National Audit Office,
under the Comptroller and Auditor General, fulfils the external
monitoring role. Select Committees of Parliament in the UK also
provide external accountability and report upon the performance
of executive departments of state. In addition, departments of
state each have an internal accounting officer.
Open government in the UK at central government
level is upheld by the Code of Practice on Access to Government
Information rather than a statute law. However, the government
favours freedom of information legislation and a White Paper,
Your Right to Know (1997), was published as a step towards introducing
this.
At local government level the Audit Commission
undertakes the role of external audit and, unlike central government,
a statute law provides access to information. However, new rules
on openness to allow planning agreements to be subject to discussion
by elected members of the local authority and the public have
been recommended by the Nolan Committee.
3.4 Guiding principles and motivation to encourage
good conduct
An ethical framework alone cannot yield good
conduct but needs underlying principles to underpin behaviour
throughout an organisation. Seven Key principles of public life
were advanced in 1995 by the Nolan Committee in its First Report.
These were carried forward in 1997 to local government in England,
Scotland and Wales but, as noted earlier, devolution will require
their clarification in Scotland and Wales. The seven guiding principles
were:
Selflessness
Holders of public office should act solely in
terms of the public interest. They should not do so in order to
gain financial or other material benefits for themselves, their
family, or their friends.
Integrity
Holders of public office should not place themselves
under any financial or other obligation to outside individuals
or organisations that might seek to influence them in the performance
of their official duties.
Objectivity
In carrying out public business, including making
public appointments, awarding contracts or recommending individuals
for rewards and benefits, holder of public office should make
choices on merit.
Accountability
Holders of public office are accountable for
their decisions and actions to the public and must submit themselves
to whatever scrutiny is appropriate to their office.
Openness
Holders of public office should be as open as
possible about all the decisions and actions that they take. They
should give reasons and restrict information only when the wider
public interest clearly demands.
Honesty
Holders of public office have a duty to declare
any private interests relating to their public duties and to take
steps to resolve any conflicts arising in a way that protects
the public interest.
Leadership
Holders of public office should promote and
support these principles by leadership and example.
Ethical conduct also requires motivation and
example: the development of the will of individuals who wish to
serve the public and/or their shareholders, employees and clients
with integrity and to make sacrifices, where relevant, in the
public interest. Suitable personnel management policies and their
implementation can help to uphold morale and develop motivation,
but leadership and example from the top are prerequisites. Ethics
in public, business and professional life is the antipathy of
self-interest, greed, corruption and selfishness.
3.5 Education and training for public life
Education and training can instil an understanding
of why ethical conduct is necessary to promote sound government
and business practices, to prevent corruption and to make staff
aware of codes and laws and of the consequences if they do not
follow good practice.
Centre for Business and Public Sector Ethics
in Cambridge has concentrated, as a national and international
leader, on developing, through research, curricula course materials
for higher education and for training and policy advice. Indeed,
Dr Rosamund Thomas gave detailed written evidence at the request
of the Nolan Committee to its first inquiry into Standards of
Conduct in Public Life and also to the Cadbury Committee on Corporate
Governance. The Centre has created a research method to analyse
ethical issues in theory and practice, culminating in a series
of books originated in association with universities and practitioners
worldwide. The books are entitled "Teaching Ethics"
and can serve as core ethics texts for emerging courses in public
and business administration.
Besides Centre for Business and Public Sector
Ethics, British universities are beginning to teach ethics as
a modern subject and there are now other research centres in Business
Ethics in at least ten universities. The British Civil Service
too, is introducing certain elements of ethics onto its courses.
3.6 Democratic trends involving the views
of the public
The extent of the public's role in creating
ethical government and an ethical society depends on a country's
democratic or non-democratic status. In a number of Western democracies,
including the UK, Canada and Spain, a loss of trust in those in
public positions rather than endemic corruption has been the cause
of modern reforms to strengthen government.
During its three enquiries the Nolan Committee
placed press advertisements asking members of the public to write
to the Committee with their concerns about standards in public
life. Its seven principles, outlined in 3.4 above, therefore take
into account the views of the British public and their calls for
greater integrity, honesty and openness in public life.
3.7 Culture and values
Ethics reflects the culture, values and norms
of a society which may be synthesised into codes of conduct, laws
and principles governing behaviour.
In the UK an ethical foreign policy has been
formulated more overtly than in the past by the Labour government
which came to power in 1997. Yet ethical dilemmas face all countries
and have to be resolved: Can a reduction in the trade of arms
be upheld when many countries are competing towards greater export
sales and increased trade? Can environmental conservation and
the protection of endangered species and forests be adhered to,
in the spirit and practice of the Rio treaties on environmental
conservation, signed by many nations, against pressures for development
to create enriched markets or personal gain? Can violence in society
be minimised when global drug-trafficking is taking place and
individual and organised crime are proceeding apace, alongside
new developments in electronic and IT communications?
These ethical dilemmas confront many nations.
Appreciating the culture and values of one's country and seeking
to uphold them through ethical policies and anti-corruption laws—as
well as grappling with the dilemmas and pressures which arise—are
all part of the process of ethics in public life and corporate
governance.
4 CORPORATE GOVERNANCE
IN THE
UK
Corporate governance is concerned with how companies
are governed, how executive actions are supervised and how a company
is accountable to regulations imposed on it by law or other commitments
to stakeholders. This section looks at current issues in corporate
governance in the UK. There are common themes in how questions
of ethics and standards of conduct are dealt with in public service
and private business. Traditionally the UK approach in both areas
has been one of self-regulation by commonly agreed codes and standards
rather than by statute. This still holds good for the time being
but, as indicated in the following sections, there is a growing
tendency to consider the introduction of laws and regulations.
This can be seen not only as a response to perceived failures
in the self-regulatory approach but also in the greater influence
of the European Union and the introduction of continental European
ideas of more formal codes and regulations into the UK.
4.1 The London Stock Exchange
The London Stock Exchange is the UK's major
stock exchange and one of the top three exchanges globally. It
provides an essential marketplace where companies can raise finance
for expansion and investors can share in their growth. By the
end of 1996 there were 2,704 companies in the main market (known
as the Official List)—2,171 British, 533 international and
252 on the Alternative Investment Market (AIM), which is for smaller,
young and fast-growing companies. In 1986 the London Stock Exchange
became a private limited company under the Companies Act 1985
and in 1991 the Exchange replaced the governing Council of the
Exchange with a Board of Directors drawn from its customer and
user base.
The London Stock Exchange regulates both capital
and trading markets. It fulfils this role by assessing applications
of companies wishing to join the market and monitoring listed
companies' compliance with the rules. The requirements for listing
on the Exchange are contained in the "Yellow Book".
The Stock Exchange also supervises the conduct of the 300 member
firms which deal on its markets.
Regulation by the London Stock Exchange takes
six forms:
— it acts as the Recognised Investment
Exchange;
— it acts as the Competent Authority
for Listing;
— it creates the rules of the Exchange;
— it monitors members' compliance with
the rules and vets new applicants;
— it regulates companies' compliance
with continuing obligations; and
— it investigates abuse of its markets.
The "Big Bang" in 1986 brought about
wide-ranging changes in the rules of the Stock Exchange, such
as the abolition of the system of minimum commission and the rules
concerning membership. There were changes also in the UK's system
of regulating investment business, with the introduction in 1986
of a new regulatory system under the Financial Services Act. The
Stock Exchange has always been responsible for overall regulation
of its member firms, but the Act added a new statutory dimension,
designed to protect investors. It divided responsibility for regulation
and supervision of the securities market into two: the supervision
of an investment business's conduct in its relation with its clients
and the regulation and operation of the marketplace. A new organisation—the
Securities Association (now the Securities and Futures Authority,
or SFA)—was created to take on the first of these roles,
and has been recognised as a Self-Regulating Organisation (SRO)
under the Act.
The Stock Exchange still regulates the operation
of the marketplace as a Recognised Investment Exchange (RIE).
In order to carry out business on the London Stock Exchange today
a firm must have authorisation from an SRO as well as membership
of the Exchange.
As the UK's Competent Authority for Listing,
the Stock Exchange also regulates listed companies.
The number of private shareholders in the UK
fluctuated during the 1990s, but the former government's privatisation
programme—including British Gas, the Trustee Savings Bank
and British Telecom—together with the tax encouragement
given to employee shareownership, led to increases in the number
of private, as distinct from institutional, investors, Sixty per
cent of shares in listed UK companies are held by UK institutions—pension
funds, insurance companies and unit and investment trusts. Of
the remaining forty per cent, about half are owned by individuals
in the UK and half by those overseas (mainly institutions). Discussion
of the role of shareholders in corporate governance, therefore,
mainly concerns the institutions particularly those in the UK.
4.2 The Cadbury Committee on Corporate Governance
The Cadbury Committee was a private-sector initiative,
set up in the early 1990s under the chairmanship of Sir Adrian
Cadbury. The ensuing Cadbury Code is now a benchmark of corporate
governance in the UK and internationally.
The Cadbury recommendations were publicly endorsed
in the UK and incorporated in the Stock Exchange Listing Rules.
The Cadbury Code defined "corporate governance" as "the
system by which companies are directed and controlled". It
put the directors and shareholders of a company at the centre
of any discussion on corporate governance.
It has been pointed out this is a restrictive
definition of corporate governance and it excludes many activities
involved in managing a company. Bodies such as the Institute of
Directors argue that UK business has been excessively regulated
for many years and that over-zealous implementation of the Cadbury
Code only adds to this burden.
4.3 The Greenbury Committee on Director's Remuneration
The Cadbury Report was a response to corporate
failures in the UK at that time. The Greenbury Report addressed
the issue of directors' pay. There was a widespread public perception
that directors, in particular of newly privatised utilities, were
paying themselves large, unjustified salaries and bonuses. The
report was intended to tackle this issue and re-establish public
confidence in business. Both the Cadbury and Greenbury Reports
were responses to things which appeared to have gone wrong. Both
Committees concentrated largely on the prevention of abuse.
The main aim of the Greenbury Committee, chaired
by Sir Richard Greenbury, was not to control directors' pay (although
some believe there is such a need), but to disclose it fully.
The new corporate governance requirements for full disclosure
of directors' salaries and for a remuneration committee mean that
companies' annual reports now include more information on these
areas. In the main, the larger listed companies have implemented
both codes fully, while smaller companies find it harder to comply.
4.4 The Committee on Corporate Governance (the
Hampel Committee)
In 1995 the Committee on Corporate Governance,
under the chairmanship of Sir Ronald Hampel, was established on
the initiative of the Chairman of the Financing Reporting Council.
This followed the recommendations of the Cadbury and Greenbury
Committees that a new committee should review the implementation
of their findings. Among the Committee's sponsors are the London
Stock Exchange, the Confederation of British Industry and the
Institute of Director's, as well as the National Association of
Pension Funds.
The Committee's remit was agreed with the sponsor
organisations, as follows: "The Committee will seek to promote
high standards of corporate governance in the interests of investor
protection and in order to preserve and enhance the standing of
companies listed on the Stock Exchange. The Committee's remit
will extend to listed companies only."
The Committee will conduct a review of the Cadbury
Code, and:
— keep under review the role of executive
and non-executive directors—recognising the need for Board
cohesion and the common legal responsibilities of all directors;
— be prepared to pursue any relevant
matters from the report of the Study Group on Directors' Remuneration,
chaired by Sir Richard Greenbury;
— address as necessary the role of
shareholders in corporate governance; and
— address as necessary the role of
auditors in corporate governance.
While there is evidence that the Cadbury Code
led to higher standards of governance and greater awareness of
their importance, there has been a lack of guiding principles
behind the rules, and heavy emphasis on management accountability
rather than business prosperity. Both the Preliminary Report (1997)
and the Report (1998) of the Committee on Corporate Governance
seek to correct this imbalance.
4.5 The principles of corporate governance
In its report, the Hampel Committee identified
broad principles applying to four areas of corporate governance:
(A) directors; (B) directors' remuneration; (C) shareholders and
(D) accountability and audit.
(A) Directors
1. The Board: Every listed company should
be headed by an effective Board, which should lead and control
the company.
2. Chairman and Chief Executive Officer:
There are two key tasks at the top of every public company—the
running of the Board and executive responsibility for the running
of the company's business. A decision to combine these roles should
be publicly explained.
3. Board Balance: The Board should include
a balance of executive and non-executive directors (including
independent non-executives), such that no individual or small
group of individuals can dominate the Board's decision-taking.
4. Supply of Information: The Board should
be supplied in a timely fashion with information in a form and
of a quality appropriate to enable it to discharge its duties.
5. Appointments to the Board: There should
be a formal and transparent procedure for the appointment of new
directors to the Board.
6. Re-election: All directors should be
required to submit themselves for re-election at regular intervals,
and at least every three years.
(B) Directors' Remuneration
1. The Level and Make-up of Remuneration:
Levels of remuneration should be sufficient to attract and retain
the directors needed to run the company successfully. The component
parts of remuneration should be structured so as to link rewards
to corporate and individual performance.
2. Procedure: Companies should establish
a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual
executive directors. No director should be involved in fixing
his or her own remuneration.
3. Disclosure: The company's annual report
should contain a statement of remuneration policy and details
of the remuneration of each director.
(C) Shareholders
1. Shareholder Voting: Institutional shareholders
have a responsibility to make considered use of their votes.
2. Dialogue between Companies and Investors:
Companies and institutional shareholders should each be ready,
where practicable, to enter into a dialogue based on the mutual
understanding of objectives.
3. Evaluation of Governance Disclosures:
When evaluating companies' governance arrangements, institutional
investors and their advisers should give due weight to all relevant
factors drawn to their attention.
4. The Annual General Meeting (AGM): Companies
should use the AGM to communicate with private investors and encourage
their participation.
(D) Accountability and Audit
1. Financial Reporting: The Board should
present a balanced and understandable assessment of the company's
position and prospects.
2. Internal Control: The Board should maintain
a sound system of internal control to safeguard shareholders'
investment and the company's assets.
3. Relationship with the Auditors: The Board
should establish formal and transparent arrangements for maintaining
an appropriate relationship with the company's auditors.
4. External Auditors: The external auditors
should independently report to shareholders in accordance with
statutory and professional requirements and independently assure
the Board on the discharge of their responsibilities under (d)
and (d)2 above, in accordance with professional guidance.
Auditors have a dual responsibility: public
reporting—to shareholders, on the statutory financial statements
and on other matters required by the Stock Exchange Listing Rules,
and private reporting—to directors, on operational and other
matters.
There are noticeable differences between the
principles of public life recommended by the Nolan Committee and
the above principles of corporate governance. The Nolan Committee
concentrated on principles such as selflessness, integrity and
honesty. By contrast, the principles underlying corporate governance
focus narrowly on the role and responsibilities of company directors
and good management practice. Indeed, the section on the need
for standards of conduct contained in the earlier Cadbury Report
was omitted from the Hampel Committee's Report. There is common
agreement, however, that over-detailed and excessive regulation
does not create ethical conduct.
4.6 The duties of company directors
The Hampel Committee sets out in its Report
the duties of executive and non-executive directors as being:
— to act in good faith in the interests
of the company and for a proper purpose;
— to exercise care and skill (derived
from common law);
— to recognise that their duties are
owed to the company, ie the shareholders.
4.7 Audit, accountability and openness/disclosure
Most of the Cadbury recommendations were well
received and acted upon by the accountancy profession, the Auditing
Practices Board and the Accounting Standards Board. However, the
primary responsibility for good corporate governance rests with
the directors. The statutory role of the auditors is to give the
shareholders independent and objective assurance of the reliability
of the financial statement and other information provided by the
company. In addition, both the Cadbury and Hampel Committees made
recommendations in the area of internal audit and controls.
4.8 Training
The Hampel Report recommends that directors
should be trained in their responsibilities, particularly as regards
relevant new laws, regulations and commercial risks.
No specific reference was made, however, to
training directors in business ethics and/or standards of conduct
in business life. UK business schools have responded to this by
devising and marketing new training programmes for company directors.
4.9 Implementation of corporate governance
The Hampel Report will now be put to the London
Stock Exchange, which will have to consolidate the Hampel, Greenbury
and Cadbury Codes in its Listing Rules.
The Hampel Committee on Corporate Governance
in the UK warns that it is not just a matter of prescribing particular
corporate structures and complying with a number of detailed rules.
Nor is it a matter of "box-ticking" components of the
Cadbury Code. Indeed, the Committee notes that it would not be
difficult for "lazy or unscrupulous directors—or shareholders—to
arrange matters so that the letter of every governance rule was
complied with, but not the substance." Furthermore, the Committee
believes that the requirement to disclose details of individual
directors' remuneration has been more intrusive in the UK than
in other countries, discouraging those overseas from accepting
appointments to the Boards of UK companies.
The true safeguard for good corporate governance,
the Committee urges, is the application of independent judgement
by experienced and qualified individuals—executive and non-executive
Directors, shareholders and auditors.
It could be said that education and training
in these aspects of judgement and business ethics are required
also. Business ethics covers wider matters of conflicts of interest,
the stakeholder principle and culture and values in a business
corporation.
In the UK, the business-government interface,
including conflicts of interest, needs further consideration,
as does the stakeholder principle. The Federal Government of Canada
has an Ethics Counsellor to Ministers—including the Prime
Minister—who provides guidance and advice to new and existing
Ministers on potential and actual conflicts of interest. The UK
is considering the appropriateness of an Ethics Counsellor to
Ministers, but no decision had yet been taken. It is clear that
the Hampel Committee needs to address wider issues of conflicts
of interest and business ethics. However, the Hampel Committee
saw no need for a permanent Committee on Corporate Governance,
which contrasts with the role of the independent permanent Committee
on Standards in Public Life.
4.10 The Nolan and Hampel Reports compared
There are noticeable differences between the
reforms for ethics and governance in public life and those in
business life. This distinction stems perhaps from the culture
of service traditionally built into public life. As mentioned
before, the Nolan Committee concentrated on positive guiding principles
such as selflessness, integrity and honesty, whereas the principles
of corporate governance focus mainly on the roles and responsibilities
of company directors and good management practice.
Although the Hampel Report seeks to correct
the imbalance between business prosperity and accountability,
work still needs to be done to emphasise broad principles of business
ethics and standards of conduct in corporate life.
The Hampel Report received some criticism for
concentrating too narrowly on business prosperity and taking too
little account of other stakeholders' concerns. In 3.1 (iv) we
noted that the government had announced a three-year review of
company law. Even though the government may wish to persevere
with self-regulation in the form of the Hampel Committee's voluntary
Code and a set of principles, rather than corporate governance
legislation (ie statutory requirements), the eventual reform of
company law will bring about other changes in directors' duties.
5. GOVERNANCE
OF THE
UK FINANCIAL SERVICES
INDUSTRY
The UK financial services industry has been
governed since 1986 by a number of principal regulators created
by the Financial Services Act of that year. Despite the strengths
of this Act with regard to the supervision and protection of investors,
it created a complicated and duplicative system for the regulation
of financial services which has attracted some criticism. The
UK is now establishing a unitary system of regulation of financial
services and banking organisations, the Financial Services Authority
(FSA). Additionally, amendments are being proposed to the Bank
of England Bill to alter the supervision of banking organisations.
The FSA currently recognises a number of principal
regulators in the financial industry:
— the Securities and Futures Authority
(SFA) regulates firms involved in the securities and future sectors
of financial services
— the Personal Investment Authority
(PIA) regulates independent financial advisers and smaller life
companies dealing with personal life and pensions
— the Investments Management Regulatory
Organisation (IMRO) regulates Fund Managers
The SFA is responsible for regulating firms
involved in dealing or advising in securities or derivatives—that
is, shares, funds, traded options and financial and commodities
futures on metals, oil, cereals and so on. Its regulatory process
consists of:
— authorisation; the vetting of a firm
to ensure it is suitable to conduct investment business
— investor protection policy; the relationship
between regulated firms and their investors is of key interest
to the SFA. Rules are developed to govern the conduct of business
between both parties
— financial risk; the financial health
of a firm is a cornerstone of the regulatory regime
— surveillance; routine inspections
of firms made without warning to check on their compliance rules,
and the monitoring of trading patterns to watch for irregularities
— investigation; where a serious breach
of rules is suspected, a more focused investigation ensues—sometimes
involving other UK and overseas regulatory bodies — prosecution;
serious breaches of the rules are considered at a more formal
level and sometimes by an SFA tribunal. Penalties range from a
warning to a fine, constraint on trading, or deauthorisation,
and individuals can be disciplined.
Where a customer—that is, an investor—is
unable to resolve a dispute, the SFA Complaints Bureau will attempt
to resolve it, and arbitration procedures are also available.
An independent Complaints Commissioner oversees the work of the
Complaints Bureau.
6. PROFESSIONAL
STANDARDS OF
CONDUCT
Standards of conduct and work in the professions
such as law, accountancy, investment and banking are maintained
and regulated by professional bodies. These are self-regulating
voluntary bodies run by their members. Many of them were established
in the last century in order to serve as a way of certifying quality
of service and to give the public an informed view of the standards
they could expect. They provide training, examinations and lifelong
regulation of standards through membership. They also provide
a link between the government, the public and business. Professional
bodies play a significant role in shaping new legislation through
providing expert comment on drafts. Although they are voluntary
bodies the regulatory role of some of them is recognised in legislation.
The example of the Law Society is used here to illustrate professional
regulation and standards.
The Law Society is the professional body for
solicitors in England and Wales. It is an independent body, and
membership is voluntary, although all solicitors come under its
jurisdiction. The Society seeks to enhance the status of the legal
profession by controlling and setting standards for solicitors.
It has various powers and duties, consolidated in the Solicitors
Act 1974 (as amended by the Administration of Justice Act 1985
and the Courts and Legal Services Act 1990).
The Law Society exercises its statutory functions,
which include:
— education and training (including
post-qualification continuing education);
— ethics and guidance/advice on conduct;
— remuneration (the issuing of Remuneration
Certificates);
— records (keeping the Roll and the
issuing of Practising Certificates to Solicitors)
Solicitors have certain responsibilities to
their clients, which include a "duty of care". The Law
Society has an Office for the Supervision of Solicitors through
which complaints can be made, if this and other duties of solicitors
are felt to have been breached.
One of the responsibilities of the Law Society
is to take action against an offending solicitor.
7. CONCLUSIONS
Codes, rather than statute law, have been characteristic
of the UK's dealings with many aspects of government, business
and professional behaviour.
There is common agreement in the UK that over-detailed
rules and excessive regulations do not create ethical conduct.
The rock on which good conduct may be built in any fast-moving
society includes ethical principles (not simply good practice,
principles or laws) to uphold standards and the will of individuals
to create not only trust in a government, company or profession,
but also a worthy and compassionate society.
Finally, it must be stressed that most of those
who serve in public life and direct companies in the UK operate
to high standards. However, there have been instances of corruption
and misconduct. No country can afford to be complacement in these
matters, and with fast-moving changes—such as privatisation
and building societies converting to banks, as well as instant
global communications—new safeguards for ethical conduct
have to be devised, implemented, revised and upheld.
REFERENCES
Books, Papers and Letters
Thomas, Rosamund, Espionage and Secrecy: The
Official Secrets Acts of the United Kingdom 1911-1989 (Routledge,
1991; to be reprinted by Ethics International Press, 1999).
Thomas, Rosamund (ed.) Government Ethics (Ethics
International Press, 2nd edn. 1996)
Thomas, Rosamund, "Ethics, Government and
Modern Society: Cross-Cultural Influences", paper presented
to the Conference of the International Ethics Network, Brisbane,
Australia, August 1996
Thomas, Rosamund (ed.) Environmental Ethics
(Ethics International Press, 1996)
Wilson, Howard (Ethics Counsellor to Ministers
of the Federal Government of Canada), letter to the Centre for
Business Public Sector Ethics, Cambridge, 26 May 1997
Official Documents
Committee on Corporate Governance (Hampel Committee),
Preliminary Report (London: Gee Publishing, 1997)
Committee on Corporate Governance (Hampel Committee),
Report (London: Gee Publishing, 1998)
Committee on Standards in Public Life, Standards
in Public Life: First Report of the Committee on Standards in
Public Life (Nolan Committee)
Report Cm 2850-1
Transcripts and Oral Evidence Cm 2850-11
(London: Stationery Office, 1995)
Committee on Standards in Public Life (Nolan
Committee), Local Public Spending Bodies: Second Report of the
Committee on Standards in Public Life
Report Cm 3270-1
Transcript and Oral Evidence Cm 3270-11
(London: Stationery Office, 1996)
Committee on Standards in Public Life (Nolan
Committee), Standards of Conduct in Local Government in England,
Scotland and Wales: Third Report of the Committee on Standards
in Public Life
Report Cm 3702-1
Transcripts and Oral Evidence Cm 3702-1
(London: Stationery Office)
Committee on Standards in Public Life (Nolan
Committee), "Misuse of Public Office: A New Offence?":
A Consultation Paper (London: Stationery Office)
Department of the Environment, Transport and
the Regions, Consultation Document: Modernising Local Government—a
New Ethical Framework (London: Department of the Environment,
1998)
Financial Services Authority, Financial Services
Authority: An Outline (London: Financial Services Authority, 1997)
Home Office, Clarification of the Law Relating
to the Bribery of Members of Parliament: A Discussion Paper (London:
Stationery Office, 1996)
House of Lords Select Committee on the Public
Service, Special Report with Evidence HL Paper 68, Session 1996-97
(London: Stationery Office)
Institute of Directors, Guidelines on Legal
Responsibilities of Company Directors (London: Institute of Directors)
Institute of Directors, Response to the Preliminary
report of the Committee on Corporate Governance (London: Institute
of Directors, 1997)
Law Commission, Legislating the Criminal Code:
Corruption: A Consultation Paper (1997) No 145 (London: Stationery
Office, 1997)
Law Commission, Legislating the Criminal Code:
Corruption (1998) No. 248. HC 254 (London: Stationery Office,
1998)
London Stock Exchange, Annual Report 1997: Access
to Central Markets (London: Stock Exchange)
London Stock Exchange: A History of the London
Stock Exchange & London Stock Exchange: Fact File 1997 (London:
Stock Exchange)
Royal Commission on Standards of Conduct in
Public Life, Report, Cmnd 6524 (London: HMSO, 1976)
Securities and Futures Authority, Annual Report
1997: An Outline of the SFA (London: Securities and Futures Authority,
1998)
Newspapers
The Financial Times, 4 March 1998
The Times, 29 July 1997
The Times, 6 August 1997
The Times, 13 October 1997
The Times, 29 January 1998
The Times, 3 March 1998
The Times, 5 March 1998
The Times, 14 April 1998
ADDRESSES
Centre for Business and Public Sector Ethics,
Cambridge (UK)
Lilac Place
Champneys Walk
Cambridge
CB3 9AW
Telephone +44 (0)1223 357458
Fax +44 (0)1223 303598
Committee on Corporate Governance (Hampel
Committee)
Gee Publishing Ltd
100 Avenue Road
London NW3 3PG
Telephone (UK only) Freephone 0345 573113; overseas
+44(0)171 393 7666
Fax +44 (0)171 393 7463
Committee on Standards in Public Life (the
Nolan, now the Neill Committee)
See the Stationery Office Books
Department of the Environment, Transport
and the Regions (free literature)
PO Box 236
Wetherby
West Yorkshire LS23 7NB
Telephone +44 (0)870 1226 236 or +44 (0)171
390 3000
Fax +44 (0)870 1226 237
Ethics International Press Ltd
Active Business Centre
St Andrews Castle
St Andrews Street South
Bury St Edmunds
Suffolk IP33 3PH
Telephone + 44 (0)1223 357458
Fax +44 (0)1223 303598
Ethics International Press Ltd publishes
the "Teaching Ethics" book series for Centre for Business
and Public Sector Ethics
The Financial Services Authority (FSA)
Gavrelle House
2-14 Bunhill Row
London EC1Y 8RA
Telephone +44(0)171 638 1240
Fax +44 (0)171 382 5900
House of Commons and House of Lords
See The Stationery Office Books
Institute of Directors
116 Pall Mall
London SW1Y 5ED
Telephone +44 (0)171 839 1233
Fax +44 (0)171 930 1949
The Law Society
113 Chancery Lane
London WC2A 1PL
Library and Information Services:
Telephone +44(0)171 320 5946
Fax +44 (0)171 831 1687
London Stock Exchange Ltd
London EC2N 1HP
Telephone +44 (0)171 797 1000
Fax +44(0)171 797 4190
Office of the Parliamentary Commissioner
for Standards
See The Stationery Office Books
The Securities and Futures Authority
Cottons Centre
Cottons Lane
London SE1 2QB
Telephone +44 (0)171 378 9000
Fax +44 (0)171 403 7569
The Stationery Office Books
PO Box 276
Lonodn SW8 5DT
Telephone +44 (0)171 873 9090
Fax +44(0)171 873 0011
In addition, most chartered UK Bodies have their
own rules and regulations to guide, educate, train and supervise
the conduct of the particular profession. Enquiries should be
made to the relevant chartered body, eg the Institute of Chartered
Accountants.
(Please note that the addresses and telephone
numbers of the organisations are printed as they were listed in
the document. The details have not been checked by the International
Development Committee).
GLOSSARY
Accounting Standards Board
The Accounting Standards Board (ASB) is the
organisation with primary responsibility for issuing accounting
standards in the United Kingdom. It also publishes exposure drafts
and discussion papers.
Auditing Practices Board
The Auditing Practices Board (APB) is responsible
for setting the auditing standards which all auditors are expected
to comply with. The Board is currently made up of, controlled
and financed by the professional bodies, with the public interest
represented by the Department of Trade and Industry albeit in
a non-voting role. The APB may become more independent of the
professions after a forthcoming review.
Building Societies
The first building societies were established
in the last century. They are mutual savings and loans organisations
whose primary function is lending for the housing market. Members
make contributions to a fund from which any of them may borrow
for the purpose of purchasing a home.
Cabinet Office
The Cabinet Office assists the Prime Minister
and the Government collectively in the formation, implementation
and presentation of government policy. The head of the Cabinet
Office (the Cabinet Secretary) is also head of the Home Civil
Service.
Civil Service Commissioners
An independent body responsible for the recruitment
of staff for the Civil Service in the UK and which ensures that
selection is made on the basis of merit by means of fair and open
competition.
Common Law/Student Law
The law in England and Wales is a combination
of common law or "customary law" and statute law. Common
law has developed over hundreds of years through the decisions
of the courts in individual cases. Statute laws are laws which
are passed by Parliament and which may overrule the common law.
(European Law may overrule law in the UK in certain areas).
Director of Public Prosecution (DPP)
Head of the Crown Prosecution Service, which
is the national prosecution service delivered locally throughout
England and Wales. Its role is to assess and implement criminal
proceedings initiated by the police force and to prepare and implement
the prosecution case. The DPP is responsible to the Attorney General
who is a Government Minister.
Executive/Non-Executive Directors
An executive director has a seat and a vote
on the board of a company and is also an employee of the company.
A non-executive director also has a seat and a vote but plays
no part in the day to day running of the company.
Financial Reporting Council
Established in May 1990, the Financial Reporting
Council provides guidance on priorities and broad policy issues
in financial reporting to the Accounting Standards Board and the
Financial Reporting Review Panel (see below).
Financial Services Authority
The Financial Services Authority was launched
in October 1997 by the new labour Government as a single regulator
for the UK financial market to supercede the large number of regulatory
bodies which had come into being after the 1986 Financial Services
Act. The FSA supervises banks and other financial institutions,
and protects the consumer by the regulation of investment companies.
Home Secretary
The Home Secretary is the Government Minister
in charge of the Home Office which deals with internal affairs
in England and Wales not covered by other government departments,
principally the maintenance of law and order including the court
system, the police, and the prison and probation services. It
also deals with immigration and nationality issues, and public
safety.
House of Commons
The lower (but de facto more effective) chamber
of the parliament of the United Kingdom which consists wholly
of elected representatives of the electorate who debate and vote
on new legislation and where the government can be subjected to
questioning over its policies. (The upper chamber is the House
of Lords).
Law Commission
The Law Commission is an independent body of
legal specialists established in 1965 (along with a similar Commission
for Scotland) to keep the laws of England and Wales under review
and to propose reforms where appropriate.
Non-Departmental Public Bodies
Publicly appointed and funded bodies with specific
functions but which are not directly controlled by a government
department.
OECD (Organisation for Economic Co-operation and
Development)
As association of western states established
in 1961 as a successor to the Organisation for European Economic
Co-operation (OEEC), which had played an important role in the
post-war reconstruction of Europe. The OECD's objectives are to
maximise economic growth while maintaining financial stability,
and to expand international trade.
QC (Queen's (or King's) Counsel)
QCs are barristers appointed counsel to the
crown; they take precedence over ordinary barristers, and wear
a silk instead of a plain gown.
Select Parliamentary Committees
A group of Members of Parliament selected from
all major parties for the purpose of monitoring the performance
and conduct of individual government ministries.
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