Is this the right direction of travel?

For the last 20 years, corporate governance has developed incrementally and the direction of travel has always been the same – towards more and more specification about generally accepted fundamentals.

These include: the role of non-executive directors, ensuring no single person has unfettered control, effective risk management, aligning executive pay to performance, an effective board, sound financial reporting and encouraging shareholders to hold boards to account.

Governance should have evolved sufficiently to ensure that these fundamentals were in place, but the financial crisis revealed they were not working as intended. Rather than taking a fresh look at what is needed for good governance, the response, once again, is more detailed specification.

The paradigm is that businesses should maximise shareholder value. Behind this is expectation of economic growth, exponential growth. In any system, growth can only continue when the resources on which growth depend are available.

Exponential growth requires exponential growth in resources to feed it. Ultimately, in any closed system, resources are finite. Mould in a Petri dish will grow when there is food. It will die when the food is used up.

Earth’s resources are finite so cannot support perpetual exponential growth in population or in consumption of oil, coal, minerals, food or water. Oil production may have peaked.

A hundred years ago, 100 barrels of oil could be obtained for an energy cost of about one barrel, now the return ratio may be less than 10 and possibly nearer three. Similarly, each unit of any commodity from grain to copper now requires more energy to harvest or extract. It also requires more water that also requires more energy.

Economic growth requires growth in debt. Exponential growth in debt is not sustainable either and we are presently discovering the consequences of too much debt in the financial system and will soon learn the impact of too much debt in nations.

We need a new approach to corporate governance. Its basis must be that companies work in the interests of society and economic growth is not a given. Boards and shareholders should not expect a company to make more profit every year. Value is not the same as profit and we must find new ways to measure how companies add value for their shareholders and for society.

I suggested this in ‘Capitalism and the concept of the ‘public good’, part of an ACCA publication Risk and reward: shared perspectives. I also said that companies should report, in their annual report, how they contribute to public good.

We could leave it to companies to choose how to articulate what they consider to be ‘public good’ and leave it to shareholders and other stakeholders to judge what they say. This should provide a more useful basis for engagement than we have at present and hopefully help prevent our becoming like starved mould in a Petri dish.