LSE Professor: UK Attitude to Regulation Must Change

Posted By: Admin, 15 Jun, 2011 - 06:06 pm


Corporate governance practitioners should abandon compliance-based regulations and focus on improving the accuracy of their reporting, according to one of the UK's leading finance experts.

Speaking at a lecture last month, Wim Van der Stede, professor of accounting and financial management at the London School of Economics, claimed that for the UK to avoid future economic downturns, regulation of best practice ought to be regarded as a principles-based issue, as every business '...must have the flexibility to tell the story of their organisation'.

Although he praised the "comply or explain" approach, Van der Stede noted the framework '...only meets its true intent if seen as "explain and demonstrate".'

He also expressed concern that '...many organisations opt to comply rather than explain as this tends to be easier and less costly.'

To remedy the problem, the professor suggests firms be compelled to produce better-quality reporting as this would generally improve the quality of governance frameworks, and encourage greater and more transparent dialogues between investors and boards.

I agree with his general ethos.

The industry certainly needs better reporting, and anything that helps us move away from a rules-based framework - where companies comply, but often negate the substance of policy and procedure - will be beneficial for all users of company information.

If we want the public to be confident in the area of financial information, investors and executives have a duty to ensure reporting mechanisms clearly reflect a company's position.

A recent investigation by the UK's largest securities and asset management trade body, the Investment Management Association (IMA), revealed the introduction of the Stewardship Code has encouraged leading institutional investors such as Tesco, Barclays, and Royal Dutch Shell to become more committed to corporate governance.

The study, entitled Adherence to the FRC's Stewardship Code, investigated 50 of the 80 firms that have adopted the code to assess their approaches to best practice guidelines.

It found that 90 per cent had published voting records and more than 80 per cent had released a press release to promote the policy and confirm their adherence.

The findings are pertinent because ultimately, institutional investors must understand more than ticking the right boxes on compliance documents and reading balance sheets, which are an Anglo-Saxon interpretation of business and only offer a financial overview of a company’s value.

There's much more to value than box-ticking and profit, but the world has changed dramatically since accounting models to measure economic wealth were first developed, so how do we measure value today?

Academics and others have put forward ideas such as the "triple bottom line" principle, which requires that organisations measure success in terms of "people, planet and profit", but so far, this approach has largely failed to make its way into mainstream reporting.

Another alternative is integrated reports, which combine financial, stewardship, stakeholder and environmental accounts to help you evaluate a company's assets, wealth, performance, impact and sustainability.

Nevertheless, it's easy to talk about making changes, but implemention is another matter altogether.

The sad truth is: it will probably take a while before a large number of professional bodies and stakeholders who utilize company information agree on the necessary changes, and that is regrettable. Company information is complex and a global regulatory framework with widely accepted accounting principles already exists, so any move to change or develop this should be carefully considered and not taken lightly. Internationally, it will be interesting to see how emerging markets respond to corporate governance; particularly with the launch of South Africa's King III governance code in 2010, which requires companies listed on the country's largest stock exchange to reject separate financial and sustainability documents in favour of annual integrated reports.

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