The normative evolution of corporate governance in the UK: an empirical analysis (1995-2014)

• Published date: 07 October 2019
• Date: 07 October 2019
• Pages: 1015-1041
• DOI: https://doi.org/10.1108/CG-07-2018-0239
• Author: Stefanie Pletz,Joan Upson
• Subject Matter: Strategy,Corporate governance

The normative evolution of corporate

governance in the UK: an empirical

analysis (1995-2014)

Stefanie Pletz and Joan Upson

Abstract

Purpose –This paper aims to analyse normative corporate governance evolution in the UK between

1995 and 2014 against the benchmark of Organisation for Economic Co-Operation and Development

(OECD)regulatory principles.

Design/methodology/approach –Methodologically, the authors conduct an empirical, longitudinal

data set analysis of the formative years of UK normative corporate governance development between

1995 and 2014. We provide a qualitative discussion of the empirical evidence that links thetype of UK

regulatory corporate governance development to financial market growth thereby adopting a mixed

approachbased on quantitative and qualitativeresearch methods.

Findings –The authors find that comparedto the OECD model of corporate governance, the UK model

is less rigid followinga more self-regulatory approachbased upon a ‘‘comply or explain’’ paradigm.Thus

it is scored below corporate governance systems that follow a compulsory implementation model.

However, even with such ‘‘low’’ tilt towards formal shareholder primacy norms, the UK has the best

performing financial market. As a quasi-empirical study, the authors suggest that there are several

historical and economicreasons for this, which together with a robust rule oflaw in the UK contribute to

this performance–and the law especially the type or tilt is less relevant.

Originality/value –This is the first of its kind empirical, longitudinal data set analysis with qualitative

elements that links empiricalevidence to regulatory developments in the wider contextof UK corporate

governanceevolution.

Keywords Comparative law, Corporate governance evolution, Empirical corporate governance,

Financial market growth, Law and financial development, Shareholder primacy

Paper type Research paper

Introduction

Simplistically, corporate governance concerns the separation of functions between a

company’s board of directors and the annual general meeting of shareholders or

stakeholders. It concerns itself with the balance of power as between the directors at a

managerial level, and the shareholders or stakeholders, whose involvement in the

company may represent direct or indirect investment through electoral functions. At

the most basic level, any division between ownership/investment, and control prompts

the risk observed by Smith (1838): “the directors of such companies [joint stock

companies] however being the managers rather of people’s money rather than of their

own, it cannot be expected that they should watch over it with the same anxious

vigilance [as if it were their own]”. The focus of this discussion is to consider how

corporate governance has evolved normatively in the UK, benchmarked against the

OECD Principles of Corporate Governance 2004, and to provide a quasi-experimental

analysis to discuss its impact upon financial market growth.

Stefanie Pletz and

Joan Upson are both based

at the University of

Sheffield, Sheffield, UK.

Received 24 July 2018

Revised 20 February 2019

Accepted 24 February 2019

DOI 10.1108/CG-07-2018-0239 VOL. 19 NO. 5 2019, pp. 1015-1041, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1015

It is perhaps surprising, in hindsight, that the interest in corporate governance largely

represents a reactive response, prompted by the catalogue of high impact corporate

events from the mid 1990’s onwards - highlighted in the UK by the 1995 collapseof Barings

Bank, but followed globally by Enron, Royal Ahold, Parmalat, HIH, China Aviation Oil, etc.

This is not to suggest that the UK had no means of assuring confidence in the shareholder’s

position before this time, but rather that the previously relied upon assumptions of the

“traditional corporate governance model” proved to be dramatically inadequate and gave

rise to significant questions. In other words, the basic convictions that UK corporate

governance had rested upon for so long, that annual reports and audited accounts would

provide sufficient confidenceand protection for shareholders/stakeholders proved to be too

simplistic and perhaps naı

¨ve in some instances.

UK corporate governance evolution and development is characterised by the dominant

conception of “shareholder value” widely prevalent in Anglo-American corporate

governance, and thereby largely reflective of an agency theory perspective. Simplistically,

as reflected by the pioneering research conducted by Berle and Means (1932), pertaining

to the separation of ownershipand control, the corporate managers are placed in the role of

an agent, with the shareholder as principal. The primary managerial focus of directors is

rooted in “fiduciary duty”, serving the interests of the company by reflecting the interests of

current and future shareholders. Corporate governance in the UK has, therefore,

traditionally concerned itself with a rather narrow perspective focussing on the relationship

between board members, management, and shareholders, in contrast with some

jurisdictions, particularly Germany and Japan, where the function of corporate governance

has traditionally addressedthe interests of a wider range of stakeholders.

Whilst the foundations of UKcorporate governance in the twenty-first century can be viewed

as emerging from the acceptance of the corporate modelas a vehicle for wider commercial

growth in the nineteenth century, the focus and scrutiny of the past 25 years activated a

structural and normativeevolution in governance which continues to rely largely ona regime

of self-regulation balanced with statutory guidance. The impetus for such scrutiny

emanated from general global commercial growth (typified in the UK by non-familial

shareholder investment), the influence of EU harmonisation, OECD recommendations, and

perhaps (more significantly) the series of domestic and global economic corporate shocks

beginning with Barings and Enron. This article explores the normative evolution of UK

corporate governance, considering its impact on the basic assumptions of the UK’s

“shareholder value” stance within the Anglo-American position in order to assess its role in

the context of a company’s performance on the UK financial market and financial market

development and growth more generally. First, we quantify the 2004 OECD Principles into

fifty-two individual variables. Second, we analyse how these factors have evolved in the UK

between 1995 and 2014. Third, we create an index to chart the development of UK

corporate governance in relation to the OECD principles. Fourthly we complement our

empirical study by referencing: the positionwhich preceded the period of corporate shock;

an overview of the initial Combined Code(1998) growing from the Cadbury, Greenbury and

Hampel reports; The Combined Codes (2003, 2006 and 2008); The impact of the

Companies Act 2006; the OECD and EU influence; as well as the 2014-2015 Review of the

OECD Principles of Corporate Governance, which resulted in the G20 Principles of

Corporate Governance demonstrating a greater possible future attunement towards a more

enlightened shareholder value (ESV). Finally, we merge and graphically visualise the

previously discussed UK normative corporate governance development change points with

UK financial market developmentchange points before concluding the article.

Review of literature

Researching effective corporategovernance mechanisms[1] and associated developments

such as attributable performance parameters in global and domestic financial markets is

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