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Evolutions in Corporate Governance: Towards an
Ethical Framework for Business Conduct
Alison L. Dempsey
November 2013
978-1-906093-86-0 (hbk)
www.greenleaf-publishing.com/evolutions
© 2013 Greenleaf Publishing Limited
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1
Introduction
1.1 Fundamentals of good conduct
A basic code of good business behaviour is a bit like oxygen: we take an
interest in its presence only when it is absent
Amartya Sen 1999: 2641
A paradigm is defined as a pattern of thinking, a set of background assumptions
taken for granted.2 This book proposes a new paradigm for understanding, developing and maintaining standards of corporate governance. Its point of departure
is not a position along the diverse and divergent paths of traditional corporate
governance and regulatory theory, law and practice, nor specific instrumentalist
questions of how to institute, implement and observe policies and practices that
function as proxies for good governance. Instead, it starts with the idea of framing
governance generally, and corporate governance specifically, firstly as a matter of
conduct that is guided by a set of fundamental ideals and principles.
While discussion of the ideals and principles that determine the nature of corporate governance at a fundamental level would seem an obvious starting point, the
1 1998 Nobel laureate in Economic Science.
2 Penguin Dictionary of Philosophy 2005. The term’s usage in this sense is associated with
the influence of Thomas Kuhn’s 1962 The Structure of Scientific Revolution (Kuhn 1970
[1962]). Kuhn used the term to refer to the theoretical frameworks within which scientific
thinking and practice operate and which encompass the general theoretical assumptions, and laws and techniques for their application, that are assumed and standardised
by members of a particular scientific community. The term has been generalised to refer
to any intellectual perception or view that is accepted by an individual, community or
society at large as a clear expression, model or pattern of how things work in the world.
1 Introduction
3
reality is that the current corporate governance landscape is populated by structurally and operationally diverse regulatory models and approaches often formed
in response to incidences of misconduct and poor governance. As a consequence,
progress towards achieving universally recognised norms of responsible business
conduct tends to be a secondary consideration to more immediate functional concerns and policy debates over jurisdiction, authority, the limits of the law and statebased regulation of global markets, and the public–private divide.
Taking a first principles approach that starts with the recognition of a set of shared
core, or fundamental, values as the basis for acceptable business conduct has the
potential to elevate governance discourse to a level that transcends conventional
geopolitical boundaries, different regulatory approaches and philosophies, and
functional differences. It also establishes a stronger foundation for constructive
engagement with diverse perspectives on the common pursuit of effective, globally
recognised standards of good corporate governance.
This engagement with diverse perspectives in turn increases the likelihood
that ongoing governance discourse and the attitudes and behaviour that follow
evolve informed and enriched by the multiple governance standards emanating
from a plurality of ‘regulatory’ and ‘quasi-regulatory’ voices, respecting rather than
obscuring historical and cultural differences and finding commonalities in existing
legal, institutional and normative governance paradigms.
1.2 Discourse and the governance of business
Some jurisdictions—notably the United Kingdom, other member states of the
European Union individually as well as collectively, Australia and South Africa—
have advanced contemporary discourse on the interrelationship of economics,
law, public policy and the public good, corporate governance and the responsible
conduct of business.3
In the United Kingdom, a Committee on Financial Aspects of Corporate Governance was struck in 1991 by the Financial Reporting Council, the London Stock
Exchange and the accountancy profession in response to business scandals that
3 These relationships have been the subject of thought and discussion for centuries. In
1699, for example, English political economist Charles Davenent wrote that ‘Trade, without doubt is in its nature a pernicious thing; it brings wealth which introduces luxury; it
gives rise to fraud and avarice . . . Lycurgus in the most perfect model of government that
was ever framed, did banish it from his commonwealth’, Charles Davenent, ‘Essay upon
the Probable Methods of Making a People Gainers in the Balance of Trade’ (1699) in Works
II, 275 quoted in Muller (1993: 993).
4
Evolutions in Corporate Governance
caused considerable damage to public and market confidence in the honesty,
accountability and value of public companies.4
The Committee was chaired by Sir Adrian Cadbury, former Chairman of Cadbury
Schweppes a company with a storied history or conducting business according to
the high ethical standards of 19th century ‘Quaker capitalism’. It issued its findings
in 1992 (Cadbury Committee 1992) following extensive consultation and consideration of more than 200 written submissions during the public comment process.5 The report—which came to be known as the ‘Cadbury Report’—its findings,
recommendations and Code of Best Practice based on the principles of openness,6
integrity7 and accountability8 is generally considered to be the genesis of modern
corporate governance having influenced governance in more than 28 countries
and in institutions such as the World Bank (Cadbury 2010: 278).
4 In particular, the sudden financial collapses of two companies, wallpaper group Coloroll
and the Polly Peck consortium. Subsequent to the Committee’s establishment, continuing controversy over director and executive compensation levels and two further scandals that shook the financial world heightened the significance and profile of the work of
the Cadbury Committee during a particularly difficult economic period: the collapse of
the Bank of Credit and Commerce International (BCCI) and exposure of its widespread
criminal practices, and the posthumous discovery of Robert Maxwell’s appropriation of
£440 million from his companies’ pension funds as the Maxwell Group filed for bankruptcy in 1992. Source: Cadbury Committee 1992.
5 The Committee’s draft report, issued for public comment on 27 May 1992, drew on a
number of reports on different aspects of corporate governance that had either been
published or were in preparation at the time the Committee convened as well as a wide
range of submissions from interested parties. Reports considered included Business Ethics and Company Codes: Current Best Practice in the United Kingdom (1992) from the
Institute of Business Ethics, an influential non-profit organisation established in 1986
to encourage high standards of business behaviour based on ethical values. The public
comment process yielded over 200 written responses to the Committee’s proposals, the
great majority of which broadly support the Committee’s approach and the final report
was published in December 1992 (Cadbury Committee 1992: par. 2.2-2.4).
6 Cadbury Committee 1992. Introduction at par. 3.1: ‘An open approach to the disclosure of
information contributes to the efficient working of the market economy, prompts boards
to take effective action and allows shareholders and others to scrutinize companies more
thoroughly.’
7 Ibid. Introduction at par 3.3. The Committee regards integrity as encompassing
‘straightforward dealing and completeness’ such that financial reports ‘should be
honest . . . should present a balanced picture of the state of the company’s affairs . . .
[and] depends on the integrity of those who prepare and present them’.
8 Ibid. Introduction at par 3.4. The Commission held that boards of directors were ‘accountable to their shareholders and both had to play their part in making accountability effective’. The board’s provision of quality information to the shareholders could achieve this
objective.
1 Introduction
5
While the Quaker values that influenced Sir Adrian’s understanding of how a
company best operates, and that were evident in the governance best practices
developed within Cadbury under his family’s leadership, were not mentioned
explicitly in the Cadbury Code, their influence was crucial. In Sir Adrian’s view the
aim of the code was to bring ‘greater transparency, honesty, simplicity and integrity
to the process of running a company’ (as quoted in Cadbury 2010: 278).
In Australia, the Bosch Committee, comprising representatives from business
and the professions and chaired by Henry Bosch, past Chairman of the National
Companies and Securities Commission, the predecessor of the Australian Securities and Investments Committee, was established in 1990 at least partly in response
to damaging publicity arising out of the malpractices of a small number of prominent companies in the 1980s.9 The formation of the committee reflected a genuine
desire to restore the reputation of the business community and to prevent a repetition of past excesses (du Plessis, Hargovan and Bagaric 2011: 137). Its publication, Corporate Practices and Conduct, set out guidelines for directors of Australian
companies with the main objective to ‘improve the performance and reputation of
Australian business by encouraging and assisting the general adoption of the highest standards of corporate conduct’ (Bosch 1995: Foreword).
In that same period, the South African government, in 1992, asked former South
African Supreme Court Judge Mervyn King, SC, to chair a private sector committee to draft corporate governance guidelines in keeping with the country’s move
towards democratic government. The King Committee on Corporate Governance
issued its first report in 1994. The report—The King Report on Corporate Governance for South Africa (‘King I’, as it came to be known)—incorporated a Code of
Corporate Practices and Conduct, the first of its kind in the country, aimed at promoting the highest standards of corporate governance in South Africa (Institute
of Directors in Southern Africa 1994). These highest standards went beyond the
financial and regulatory aspects of corporate governance, taking an integrated and
inclusive approach to good governance in the interests of a wide range of stakeholders beyond shareholders that was groundbreaking and to this day regarded as
ahead of its time.10
A decade later in Canada, an independent national commission, the Canadian
Democracy and Accountability Commission (2002) issued its report, The New Balance Sheet: Corporate Profits and Responsibility in the 21st Century, containing 24
recommendations to significantly broaden the concept of corporate accountability
9 Two of the most notable, which inspired intense public backlash and provoked significant law reform activity, were the corporate collapses of HIH and One.Tel. HIH is the
largest collapse in Australian corporate history and the subject of an A$40 million Royal
Commission (HIH Royal Commission). The Commissions findings were published in
April 2003 (HIH Royal Commission 2003).
10 The evolving global economic environment together with recent legislative developments, have necessitated updates to King I, ‘King II’ and ‘King III’ (Institute of Directors
in Southern Africa 2002, 2009).
6
Evolutions in Corporate Governance
beyond the narrow focus on profit. Specifically, the Commission recommended that
corporate accountability extend to employees, customers, communities, the environment, the country and the global community. This view of corporate accountability had broad-based support. According to a national survey conducted on
behalf of the Commission to supplement the cross-country hearings and separate
submissions11 to the Committee, 74% of shareholders surveyed agreed that ‘business executives have a responsibility to take into account the impact their decisions have on employees, local communities and the country as well as making
profits [sic]’.12
These expressions of a broad business accountability were echoed roughly a decade later in a 2010 communication by the European Commission, Towards a Single
Market Act, stating that, ‘[I]t is of paramount importance that European businesses
demonstrate the utmost responsibility not only towards their employees and shareholders but also towards society at large’ (European Commission 2010a).
Other jurisdictions have also witnessed over the past decade a broadening of
mainstream business discourse to address issues of wider socioeconomic implication. Such shifts are evident even in the United States, where the long-established
view of many academics, policy-makers and market participants—that economies
have a separate and superior existence to the rest of society—fundamentally differs
from the majority view in the rest of the world.13
At the same time, globalisation of business and profound shifts in the manner
and means of communication and the dissemination of ideas and information
over the past two decades present both challenges to and huge opportunities for
this form of governance discourse broadly and, in the business context, specifically.
Questions such as whose rules and which boundaries exist to constrain and
guide business behaviour arise when corporate activity occurs variously outside
the specific geopolitical limits of the law in a marketplace that is populated by a
plurality of standards, interpretations, expectations and incentives articulated by
numerous diverse constituencies. While finding answers proves challenging, the
need to address these kinds of question is ever more critical as the impact and
11 In addition to the hearings, the Commission met or received submissions from 157
organisations and individuals from government, the corporate sector, organised labour,
non-governmental organisations (Canadian Democracy and Accountability Commission 2002: Appendix B).
12 Vector Research poll conducted from 28 September to 8 October 2001 with 2,006
adults across Canada, (Canadian Democracy and Accountability Commission 2002:
Appendix C).
13 Douglas Branson (2001) elaborates on how other models of capitalism, such as family
capitalism, bamboo capitalism, crony capitalism, guided capitalism, managed capitalism and even gangster capitalism in developing and newly industrialising economic
regions, are grounded in cultural norms and social institutions that have at least equally
significant existence to the economy.
1 Introduction
7
consequences of business actions and decisions are far-reaching and enduring,
and the boundaries between public and private sectors, individual and community
interests are constantly challenged.
Whatever the private interactions and transactions and despite constitutional
barriers to effective governance oversight, all business takes place within a wider
social, political and economic framework and relies on public goods and social
licence to operate. Its primary purpose is to satisfy human and material needs
by efficiently producing and supplying goods and services and, as such, business
activities—exploration, invention, research and development, production, trade,
marketing, investment and finance among others—are inherently social acts
between parties that take place, have implications and consequences for, and must
be considered in light of the larger societal arena.14
Business conduct and governance have the potential to be good when guided by
the ideals and principles of ethical behaviour that include fairness, honesty, humility, integrity, respect for others, responsibility and trustworthiness.15 This book sets
out to explore the potential for ethics and ethical principles to constitute the overarching framework—or meta-framework—that guides and informs choices in the
conduct of business and governance policies and principles, and the laws, rules
and standards that reflect those choices.
14 Granovetter (1985: 481-93): a response to the under-socialisation (rational economics)
and over-socialization (sociological theory) of economic behaviour that markets and
hierarchies should be understood as embedded in social networks. Coleman (1994):
regarding exchange relationships as derived from inherently social and cultural norms
rather than purely rational calculus. Woller (1996): social norms underpin Adam Smith’s
market. Morrison (2006: 388): central to Marx’s examination of the effects of the modern economy on human labour processes was the notion that labour served to connect
individuals to themselves and to the community through the process of production. He
identified four sources of alienation from the inherently social function of work due to
changes to the labour process through industrial capitalism such as the commoditisation
of work, price competition and the pursuit of private gain.
15 There are numerous bases for identifying these specific values. For example, in 1994 the
Institute of Global Ethics conducted surveys, interviews and established focus groups
in 16 countries around the world with a view to identifying the existence of core values
that transcend individual cultures. The list that emerged included, in addition to trust
or trustworthiness: love, truthfulness, fairness, freedom, unity, tolerance, respect and
responsibility. In 1996, the Institute with the Gallup Organization survey 272 participants
representing 40 countries and more than 50 different faiths who were gathered at the
State of the World Forum convened by Mikhail Gorbachev and other world leaders. The
research found strong convergence around: truth, and compassion and responsibility. In
a later survey on 1,100 managers in major US financial services firms the top values were:
honesty, responsibility, respect and fairness. Source: Kidder (n.d.).
8
Evolutions in Corporate Governance
1.3 Content and structure
Corporate governance is a complex, many-layered and multi-dimensional subject
that continues to evolve in response to a range of influences that create, define,
implement and shape it.
While often considered from legal, institutional and corporate centric standpoints, this study situates it in a wider context that opens the discussion to the
influence of broader cultural norms in influencing attitudes, behaviour and the
nature of decisions relating to choice and conduct beyond the narrow focus on
compliance, and the roles played by diverse actors in the construction, testing and
recalibration of corporate governance standards and practice both within the corporate sphere and in a wider societal context.
This book is divided into eight parts.
Part I introduces the book’s central concepts—ethics, conduct and governance—
and its main themes of discourse, engagement and the evolution of contemporary
norms and standards of behaviour for business conduct.
Part II considers the long-standing dynamic between business, government and
society by providing an overview of recent and past crises in governance and the
nature of past and recent responses to corporate governance and market failures. It
examines how the consideration of alternative perspectives on the nature, source
and expectations of business conduct standards can potentially broaden, enrich
and legitimate corporate governance discourse, policy and practice.
Part III provides an overview of corporate governance regulation and standardsetting in three jurisdictions that have been influential in the evolution of modern corporate governance—the United Kingdom, the United States and Western
Europe. Further, it suggests that approaching corporate governance from a socioeconomic standpoint provides a perspective on business conduct and governance
that recognises its place in a wider systemic rather than strictly corporate centric
discussion.
Part IV considers the implications of a global marketplace for the authority and
effectiveness of state-based legal and regulatory mechanisms. It then examines the
expressive and normative functions of informal as well as formal sources of governance standards and their connection as seen through the evolving co-existence of
normative, principles-based and prescriptive approaches to regulating corporate
conduct on a transnational level.
Part V juxtaposes the concept of pursuing common regulatory goals within a
framework of constructive engagement with the powerful normative role that
modern corporate entities play in shaping standards and expectations of business
conduct and governance alongside and in some respects well beyond the formal
role of state institutions.
Part VI addresses the evolving nature of the relationship of business to society,
including the engagement of a range of stakeholders in the discussion and formulation of standards of corporate conduct and governance that extend to the
1 Introduction
9
ethical, environmental and social dimensions of corporate behaviour. It also considers change occurring in the traditional regulatory dynamic, where innovation
has led to combinations of mandatory, voluntary and market-driven approaches.
Part VII explores developments in contemporary governance discourse and practice facilitated by modern advances in communication technologies that present
opportunities for broader participation and positive change as well as inherent
risks that come with hidden and powerful influences.
Part VIII returns to the initial proposition that ethics as a constitutive, or first
order, framework for governance can advance discourse and practice towards a
system where the standards of conduct for business include explicit recognition
of fundamental norms such as fairness, honesty, integrity and responsibility and
where ethical principles inform and guide decisions and actions. It concludes with
a summation of the challenges and opportunities for those whose decisions and
actions inform and shape the governance landscape.