The New Consensus of the Governed: Re-imagining Corporate Governance

Professor Kenneth Costa

 19/01/2010

1.  Introduction

Good evening ladies and gentlemen. Welcome to my fourth lecture in this series.

In my previous lectures I argued. among other things. that for finance fully to thrive we needed to revive the moral basis of capitalism and enter into a new settlement between finance, government and society.

In tonight's lecture, "The Consensus of the Governed: Re-imagining Corporate Governance", I would like to consider a very important question which flows from these earlier considerations: the nature of governance as it applies to companies, especially financial ones.

The financial crisis has obviously thrown this question into sharp relief. However we view the crisis and its aftermath, some institutions undeniably suffered from poor governance. To my mind, those failures have raised a particularly pressing issue: how simultaneously to restore confidence and resume the growth urgently needed to relieve the economic bind in which we find ourselves.

There is a crisis of values and of value.  The ethical values which inform our actions in finance will be central to re-establishing confidence and winning support for finance's role in restoring stability and growth. As Peter Sands, group chief executive of Standard Chartered, said recently in an interview: "All of us who are bankers have to recognise that our role is value-laden at this point."

But we must also create value - profits, wealth and jobs. So we need governance for growth. Governance should facilitate, not throttle, growth.  It must allow a constructive interplay between risk and reward.

Corporate governance, of course, has been much debated for quite a few years. At the government level, just since 1992 and in this country alone we have had the Cadbury, Hampel, Greenbury, Higgs, Turnbull, and Tyson reports, culminating in Sir David Walker's review last November of governance of banks and other financial institutions. I sometimes wonder why the 1990s have not been dubbed the "corporate governance decade", so busy were the report writers.

In addition, the CBI has looked at directors' remuneration, the Stock Exchange has published its Combined Code, and the FSA has its corporate governance guidelines and corporate listing rules. Other countries have undertaken similar reviews. In 2002, the United States Congress overwhelmingly passed the Sarbanes-Oxley Act, whose principal purpose was to strengthen accounting controls.

At the international level, the OECD first produced its influential "Principles of Corporate Governance" in 1999. The snappily titled United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting has its "Guidance on Good Practice in Corporate Governance Disclosure".  Among others, the World Business Council on Sustainable Development has also weighed in with recommendations about how to make companies more sustainable.

Many of these reports were in response to corporate scandals, from Maxwell to WorldCom by way of Enron, which revealed that it could be embarrassingly easy for companies - or a few directors - to mislead shareholders, employees, regulators, the government and the public at large. The reports often dealt with specific issues such as the composition of boards, risk mitigation or pay.

Taken together, however, they constituted a valuable body of good practice and were generally a distinct if incremental advance on what had gone before. They seemed to meet many of the concerns of government, regulators and the public - not to mention companies themselves. Equally important, investors generally accepted the trade off between additional bureaucracy and cost on the one hand and fewer "unknown unknowns" on the other. If there was a theme, it was reducing risk - which of course is very much on everyone's mind today.

Nevertheless, all these carefully crafted tomes and the laws they spawned plainly failed to prevent the financial crisis and its economic fallout. A new wave of reports, rules and recommendations is in the offing. We have seen Sir David's very useful contribution, which the United Kingdom government has embraced. The European Union, G20, Basel committee and others have also produced - or will produce - proposals. It is inevitable that the United States will introduce further legislation. Talk of international regulation is no longer so fanciful. At the very least, there will be closer cooperation between national regulators.

No doubt much of this will go some way to restoring the confidence of investors and the public. But I will argue tonight that there are deeper problems than how to balance boards or keep remuneration committees at arms length.

The recent crisis, coming as it did after a period of extensive scrutiny of, and debate about, corporate governance, suggests that the checks and balances so necessary to the efficient and successful running of organisations no longer work as well as they should. In some instances they broke down almost completely. I am reminded of a notice which once appeared in Farringdon Tube station: "Due to staff shortages the automatic ticket machines are not in use."

The reasons for these failures are not freak combinations of events - perfect storms of corporate governance - devastating though the financial tornado has been. Nor are they attributable glibly and conveniently to the weaknesses of a small number of individuals which might be remedied by marginal adjustments to the character and composition of company boards. Nor even are they simply attributable to shareholders and other constituencies taking their eye off the ball - although that certainly happened in some cases.

Rather, the reasons are much more structural and persistent. They include changing social attitudes towards authority and responsibility, the complexity of governance in the modern world, and a social crisis of values, particularly as it affects companies. In short, they raise the fundamental question of whether the essentially nineteenth century company structure which is the basis for corporate law and organisation today is really fitting for the twenty-first century.

Updating the model may well require major changes in such areas as restoring common values, re-establishing a shared vision of what a company is for, and creating the operational mechanisms which best capture and reflect the shared values and vision. Values and value creation are inseparable and essential.

2.  A crisis of governance

Let me paint the broader picture.  Governance today is probably more difficult than it has even been.  This fundamental observation applies to all manner of bodies such as NGOs, universities and international organisations as well as companies and governments.  A sprawling industry of regulators, management writers, business schools and assorted experts has sprung up to ponder on governance and address its shortcomings.

What do I mean by governance? There sometimes seem to be as many definitions as there are definers.  But I simply mean how an organisation is directed and controlled. This encompasses processes, customs, laws, policies, institutions - and absolutely fundamentally, people.

Running almost anything has become more difficult because society is much more democratic. This is a global trend. It is common in the west to remark with a decree of self-congratulation that political democracy has spread to parts of eastern Europe, Africa, Latin America and Asia. But I do not mean by "democratisation" that countries are necessarily more likely to follow a democratic political system as we would understand it, despite that appearing to be the experience.  My point is that even in countries which might not be democratic in a political sense there is more democracy in a social sense: people are more aware and have greater resources with which to challenge the powers that be.

Democratisation is a complex phenomenon, but four of the forces behind it are:

The successful example of the west, perhaps epitomised by the collapse of communism and the end of the Cold War
Economic globalisation or the spread of the market, which has raised aspirations
Higher standards of education, and
The digital revolution.

This last has dramatically cut the cost and availability of information, thereby reducing the asymmetry of information which prevailed between governors and governed for most of history, and gave governors the upper hand. We have seen in Iran, for example, how opponents of the government are able to distribute mobile footage, emails and tweets within minutes of an event occurring. Information about companies is available on a scale and with an immediacy never seen before. Often, the modern complaint is that we suffer from a deluge, not a dearth, of information.

Partly as a result of the digital revolution, centres of traditional authority such as religious leaders, monarchy and aristocracy, even the educated classes and what it is again fashionable to call the "political class" hold less sway than just a generation ago. Instead of a few sources of authority and relatively clear standards of behaviour, to which a large section of the population subscribes,we have multiple power centres nationally and internationally. Ideas proliferate and spread rapidly, which is healthy, but the criteria for evaluating them are varied and shifting, which is less healthy. Thus besieged, it sometimes seems that leaders, elected and appointed, lack the nerve really to lead.

As both cause and consequence of these changes, deference has declined, which I do not lament except to note that a social cement of comparable strength has not replaced it.  An essential ingredient in any social cement is justice. Our generation, however, is much less certain about what constitutes justice than its recent predecessors. In his book "The idea of Justice", published last year, Amartya Sen, the Nobel laureate economist and philosopher, has observed that contemporary notions of justice are pluralistic. For any given situation, there may be competing explanations of just behaviour, all valid in their own terms yet leading to different conclusions.

This means that we cannot assume that the old social contract with government still applies. Neither government nor society can be relied on to deliver their side of the bargain if an idea of the just is shared weakly or not at all. The argument is particularly true of societies in which democracy's hold is tenuous.  But even in western democracies, it is not always obvious that the governors have the consent of the governed or that governors can provide what the governed expect in return for their support. Concern about a "democratic deficit" is widespread.

Sen has drawn attention to a troubling possibility - that western notions of a social contract dating in modern times from eighteenth century thinkers such as Locke and Rousseau are fraying.  Justice is another way of thinking about the values which underpin, and are enclosed within, a social contract.  To put the idea in a business context, consider for a moment the respective claims of the advocates of shareholder value and the advocates of sustainable growth. Each has a different concept of the fundamental value of making money, each is logical on its own premises, and each leads to potentially very different kinds of companies.

Even more troubling perhaps is the thought that a plurality of values or ideas of justice is burgeoning just as we see the rise of a new authoritarianism. To reiterate my point about democratisation as distinct from democracy, China's apparent success and confidence illuminates the west's doubts about itself. China boasts more internet users than any other country - over 500 million of them - but has different values when it comes to the function of search engines, for example, Google.  There is no necessary relation between technology and justice.

What price western democracy as China's power and influence grow? Seeing the example of a resurgent and authoritarian China, will countries in Africa and Asia - where democracy often has shallow roots - also see a different model for their own future? In some respects, after all, the controlled state-controlled capitalism of say South Korea or Singapore is not so far removed from the export-led, investment-driven Chinese model.

And as if to revive old memories. Russia is also an unknown quantity.  Its journey from communism seems to have stalled in a lay-by.  Its model may be less attractive than the Chinese, if only because Russia is less successful economically. But Russia still has a significant voice in world affairs, notably in Europe, and its values cannot be ignored.

The financial crisis has added to the pluralist strains.  Politically and socially it has corroded trust in financial institutions and those thought to run and regulate them. Without trust, which must be grounded in shared values or ideas of justice, governance cannot work. If trust in so important a part of our economy as finance is lacking, we are in deep trouble.

3.  Corporate governance under the microscope

Given this background, it is hardly surprising that corporate governance is under the microscope again

The stakes are high.  As Sir David pointed out, the cost of getting governance of financial institutions wrong can be high for consumers, investors, government and the economy as a whole. Corporate governance, arcane and abstract as it might seem, affects the pound in the pocket of every man, woman and child in the land. The cost of rescuing the financial system and the output and jobs lost to recession are well known. But there is something more profound as well.  It is the "value" part of my "values and value" formula. To reiterate, corporate governance has a powerful bearing on the ability of the economy to create wealth and meet peoples' aspirations. Corporate governance has to be about creating value.

At this point we should ask: What is good corporate governance? What determines whether the contract between governor and governed works?

I suggest that good corporate governance is:

Ethical
Open
Inclusive
Effective in meeting the organisation's goals, and
Accountable.

These are the essential values.  By ethical, I mean the company as a whole meets standards of probity, fairness and consideration which one should expect of the individuals running it and of society.

By open, I mean the company communicates freely, honestly and in a timely fashion about its work, goals and values.

By inclusive, I mean the company's values and openness apply to all who may have a reasonable claim on its time and work.

By effectiveness, I mean that the company does profitably  what it says it is going to do.  As I have argued in a previous lecture. there is no purpose in the preceding three values if the company loses money. Being profitable is part of the company's moral makeup.

And by accountable, I mean the company can be held responsible for its actions.

The practical consequences of adhering to these values is that the company is accountable, decision making is clear and credible, and shareholders can make good use of the information provided. Of course, nothing a company or any other organisation does can necessarily be held responsible for the actions of shareholders or other parties.  Shareholders, for example, have to decide for themselves whether to continue to invest in a company. What is important, however, is that they have the wherewithal to make such a decision.

In the UK, all this is supposed to be embedded in, and upheld by, a sophisticated corporate governance framework.  We have the Companies Act, regulation through the FSA's listing rules, and the Combined Code (soon to be amended and supplemented by a Stewardship Code for institutional investors).  We also have a very active media, whose coverage of business has improved in quality and quantity in recent years, and with it a flourishing financial public relations industry. In a democracy, the media for all its faults is vital to expressing values and exposing failures of values.

With the possible exception of the media, the whole apparatus is a direct descendent of the nineteenth century limited liability company. That model addressed three problems: in modern parlance, the agent-principal dilemma, transaction costs, and equity.  Put more practically: How can multiple owners control the management? How can an organisation such as the firm reduce the cost of what might otherwise be many separate relationships? And how are the profits distributed?

The limited liability company was clearly superior to private partnerships or bilateral business agreements in its capacity to mobilise resources and scale up operations. In effect, owners or shareholders said to managers: "You will have reasonable freedom to run the company on lines we set down and in return for paying you and leaving you to get on with it we will take a fair share of the proceeds".

One assumption was that directors would be familiar with the company's activities and preferably be directly engaged in running it.  But that begged questions about how information flows at management level, questions which have grown sharper with the increased emphasis in modern times on the role of the non-executive director. Sir David's report makes several practical recommendations designed to ensure that non-executive directors are rigorously selected and properly informed, trained and supported to do their job.

This is where the crucial condition of shared values comes in. However you define the objectives of an organisation and the parties involved - stakeholders in modern jargon - what really binds them together and makes combined action for mutual benefit possible is shared values. Before you even think about purpose, structure and direction, you need shared values. Hence the enthusiasm with which nineteenth century businessmen embraced the limited liability company after the Companies Act of 1862.

R.C.K. Ensor, the author of the penultimate volume of the Oxford History of England, wrote of the Companies Act: "At first it was aimed more at limiting liability than at divorcing the ownership from the management of factories and works. But as time went on, it had increasingly the latter effect."

The rapid change also overtook the banking business.  A large number of private banking firms survived until the crash in 1866 of Overend and Gurney, the most celebrated failure before that of Northern Rock.  The historian writes: "The Overend and Gurney failure gave a strong stimulus to their conversion into limited liability companies."

Of course, values can be as hard to grasp as soap in the bath and as obscure to outsiders as Masonic rites.  Their internal logic can take a subtle form. London club land lore relates a letter sent to members of one club: "You are reminded that you may not bring your mistress into the club unless, of course, she is the wife of another member."

I would contend that at no time has understanding the values been more difficult than today. A large part of the problem with corporate governance today is divergent values - as I suggested earlier when briefly summarising Sen's thinking, not necessarily good versus bad values but just different values. A result is that the checks and balances on which the nineteenth century model rested are upset.  The twenty-first century world of global democratisation is far removed from the mid-nineteenth century world of relatively small numbers of middle class shareholders backing a pottery in Stoke-on-Trent or a cotton mill in Manchester.

We can see this if we analyse corporate governance more closely. Corporate governance ought to be viewed at three, albeit connected, levels: international (including regional); national; and company.

At the international level, corporate governance is a curate's egg. There are international guidelines, as I mentioned, and responsible multinationals try - with some success - to spread good practice. More recently, the G20 has intervened as a result of the financial crisis with agreement on issues such as bank capital and financial sector remuneration. The European Union model of colleges of regulators appears to be gaining ground, although in my view it merits further serious debate.

In any case, one must be wary of regarding global standards and regulation as a panacea. First, we are a long way from gaining acceptance for universal rules with legal status. Second, there must be grave doubts about the practicalities of legal enforcement. For example, to revert to an earlier thought, are Chinese companies - which are increasingly flexing their muscles internationally - in a position to accept rules of global corporate governance?

An example close to home of the difficulties of winning cross-border acceptance of legally enforceable regulations is the steady harmonisation of regulation in the EU. The draft directive on Alternative Investment Managers or Solvency II are contentious, to say the least. But that is the point. It is not enough to argue that EU members are bound by European law, the most potent recent manifestation being the Lisbon Treaty. The crucial point is that the underlying values and objectives of EU member states can still vary considerably.  London and Berlin do not view hedge funds in the same light.

Differences over the efficacy of one board or two board corporate structures, or family versus public ownership, or bank capital versus equity capital - often seen as the dividing lines between continental European and so-called Anglo Saxon corporate models - pale by comparison with shared values expressed in the rule of law and the responsibility of corporate managers to constituencies beyond owners or shareholders. The same argument could be made about other forms of ownership such as Japanese Keiretsu and Korean Chaebol.

At the national level, often overlapping with international practices, we see more clearly how crowded the corporate governance field has become.  Apart from boards, shareholders and employees we have consumers, suppliers, financiers, lobby groups of all kinds, regulators, the media and rating agencies. I'm sure you can think of others.

All compete and jostle to have their voice heard, to make their claim - which as I say may well be reasonable - on the company about the environment, labour conditions, trading with certain countries, cruelty to animals or whatever it might be. Campaigns against companies and protests at shareholders' meetings have become a normal part of corporate life.

The law and corporate governance codes have struggled to reconcile these competing - and sometimes contradictory - claims. The search for simplification or reconciliation of these claims is one reason for the rise of private equity, as investors flee from public scrutiny to the supposed security of relative anonymity.

One perhaps paradoxical response to the impact of democratisation on business has been ever more regulation to protect consumers, monitor management and reduce risk. It is a legalistic approach to reconciling the competing claims on companies, often urged on by the very people making those claims.

In my neck of the woods, the financial sector, the intensity of regulation has grown extraordinarily. If you had suggested thirty years ago that the City would be subject to the present degree of regulation men in white coats would have come to take you away. And yet despite the regulatory regime, trust between finance and the public is severely strained.

Indeed, the current bout of regulation reflects that distrust.  The public believes that the checks and balances failed to prevent the excesses leading to the financial crisis. Rightly or wrongly, finance and society are often seen as having different if not conflicting values. That concern or belief explains much of the tension in the present hearings on Capitol Hill and at the Palace of Westminster.

At the corporate level, more specifically, two developments have shone a particularly intense light on companies. One is globalisation and its consequent complications for companies, especially those which operate internationally and have to deal with multiple national laws and customs. Less geographically diverse companies are affected as well, if only because bigger companies tend to set the tone for smaller ones.

The difficulties of meeting all the demands - such as the very important but sensitive area of disclosure - different jurisdictions impose may considerably complicate maintaining the normal checks and balances of corporate governance.  The sheer size of many multinationals compounds the difficulties - as it does for other types of big organisation such as the National Health Service or Indian Railways or the Japanese post office.

The other development is the re-appearance of state ownership. In this country, the government owns all of Northern Rock, more than 80 percent of RBS and more than 40% of Lloyds TSB. In effect, these big and - in the cases of RBS and Lloyds TSB - international and strategically important businesses have been nationalised.  Codes of governance did not really take this twist of fate into account. If anything, the trend has been in the opposite direction, towards privatisation.

You can see the dilemma nationalisation poses in how the government has responded to its unexpected stewardship of RBS and Lloyds TSB. Despite controlling the banks it decided not to put any directors on the boards. In one way this is understandable. The government wanted its involvement to be as short and limited as possible, signalling that its share holding was a temporary measure.  For that reason, it respected the view of directors and shareholders that the banks should be run as far as possible on normal commercial lines.

But in another way, it was an odd decision. It flies in the face of accumulated opinion on corporate governance that shareholders should exercise their responsibilities in roughly similar ways in all companies and that their dealings should be open. The policy of United Kingdom Financial Investments, the government's holding company, is to vote on resolutions. But how full is disclosure about decision making on voting? Who knows what really goes on between UKFI and the banks in which it holds dominant stakes?

Is this an open - publicly accountable - relationship, not least because huge amounts of public money are at risk?

In short can - should - a major shareholder exercise rights without nominating directors? Beyond that particular point about the nineteenth century model, we have seen other repercussions of the financial crisis such as the sight of parliamentary and congressional committee subjecting bankers to highly personal grillings, attempts to tax bonuses in the UK and proposals to tax banks in the US to recoup at least some of the cost of the Troubled Asset Relief Program, and Lord Mandelson urging on investors the merits of long-term holdings.  Although it is not the intention, the effect is to challenge the efficacy of the nineteenth century corporate governance structure.

4.   Governance in the financial sector

How can companies, especially those in the financial sector, handle these developments? The starting point must be that banks, the core of the financial system, have features which set them apart from other companies. These features include:

The ability to create credit
The reliance on judgements about the future: will the client repay the loan? And,
The high cost of failure for society.

Moreover, bank shareholders enjoy the rare if not unique privilege of their liability being limited while the liability of society is virtually unlimited in the event of financial failure, especially in the case of so-called "too big to fail" institutions.

I might add from my own experience that the highly international nature of banking ought also to be taken into account. While many businesses are international these days, the free-flowing, global reach of capital makes banking probably the most international of industries. You can see the human consequences for management every time a jet-lagged director stumbles out of plane in a distant time zone straight into a board meeting.

These characteristics of a bank pose penetrating questions about how a bank is governed. A lot of ink has been spilt on the nature of boards of directors. But it is not enough for directors and senior executives to be technically competent - the emphasis of many of the reviews of corporate governance and a refrain Sir David Walker has echoed. The presence of non-executive directors, expert or otherwise, seemingly did little to guide some bank boards to wiser decisions.

Indeed, the academic evidence appears to be that there is no clear connection between the composition of a company's board and the company's performance. But that is not an argument for neglect. Some banks escaped the financial crisis almost unscathed, and part of the difference in outcome must be the quality of the board.

I believe that we need to think again about what skills we seek in a director - what combination of ethical understanding, grasp of systemic risk and ability to mentor successors. Part of the problem is that conventional thinking about corporate governance generally ignores what I called in an earlier lecture the 'silent partner' - broadly, society at large.

Some companies do this already, but there is still a case for saying that financial institution directors are drawn from too narrow a range of backgrounds. Too often, company boards are still analogous to a hospital ethics committee made up only of doctors. Perhaps we need to think more imaginatively and to bring on to company boards individuals who can in some fashion embody the silent partner. Is it too fanciful to envisage individuals with backgrounds in education, the armed forces or the public sector gracing company boards?

As I have already argued, the position of a bank's board becomes even more acute when the government is a dominant shareholder. Recent pressure to shape banks in their lending and remuneration practices have thrown the question into sharp relief. If government is a partner, what kind if partner is it? If government is not a partner, where does the board stand?

Such questions go to the heart of corporate governance. For whose benefit is the company run?  The standard answer, enshrined in UK corporate law and convention, is: the shareholders.  But government may have a different answer: the public interest. And other 'stakeholders' may also have different answers, broadly seeing the company as a means of serving and supporting a range of groups whose collective interest in the company is the guarantee of its welfare - the stakeholder model.

However, a stakeholder model is far removed from the standard agent-principal model of board and shareholders because it expands the range of actors or principals with a legitimate interest in the company and correspondingly circumscribes the role of the directors or agents. Critically, it impinges on the standing of the providers of capital, the shareholders.

Unfortunately, shareholders were too often the dog that didn't bark in the run up to the financial crisis. They did not cover themselves in glory. They patently failed to restrain managements, which often seemed to act autonomously. And if some banks' bonus decisions are a guide, the shareholders still lack enough influence - which is why a Stewardship Code has been recommended. If evidence were needed of the confusion of values, it is that - in the official view at least - shareholders need guidance as to their duties and responsibilities.

If directors and shareholders are not the whole answer, what about regulation --- that knee-jerk contemporary remedy? The crisis suggests that regulators did not cover themselves in glory either. Under Adair Turner, the Financial Services Authority has admitted failings and distanced itself from "light touch" regulation. Sheila Bair, chair of the US Federal Deposit Insurance Corporation, said recently that regulators were "wholly unprepared and ill-equipped."  No doubt lessons will be learned and deficiencies remedied. But regulation can go only so far.

So the prime responsibility must rest with the company itself.  That raises the ultimate question: Can the nineteenth century limited liability structure work in the twenty-first century for financial institutions, or for any other type of business for that matter?

In principle, there is no shortage of alternative forms of company ownership, some of which predate the limited liability company by centuries. Indeed, most are represented in the corporate world in one way or another. But coops, mutual's (albeit John Lewis is back in fashion), private equity, partnerships, family ownership, state-controlled and the rest have generally revealed flaws which make them less suitable than the classic public, limited liability  company.

It is no accident that the world best known companies - Microsoft, Sony, Barclays, Daimler - are mostly public, limited liability companies even though that model is being challenged. The reality of running a big modern business such as an international bank is that agents and principals are unavoidable. The thousands of stakeholders in the business simply cannot be the managers. Until a radically different organisational form is devised, financial institutions are likely to continue to be public, limited liability companies.

5.  Towards a new model of corporate governance

A totally new model of corporate governance to match the introduction of the limited liability company in the nineteenth century looks to be beyond our reach and perhaps beyond our imagining - for the moment at least. But the profound asymmetry of risk financial institutions enjoy must be addressed effectively and thoroughly. If financial institutions, and other types of company, do not take a lead, someone else will and financial institutions may not like what they see.

At the beginning of this lecture I laid down two sets of criteria which should be the foundation on which we can rebuild confidence and economic expansion. One was governance for growth. The other values and value. I have argued that deep social forces such as democratisation are challenging the prevailing corporate governance model, that the unique features of banks mean their governance must be addressed urgently, and that tinkering with boards or regulation is insufficient unto the hour.

Furthermore, moving towards a new model of corporate governance is vital for the United Kingdom, where the financial sector is large relative to the economy and many major banks are present or domiciled.

Let me suggest three areas in which we should act: values, vision and voice.

First, we need to restore common values.  Companies cannot do this by themselves. In so far as the problems of corporate governance reflect wider societal problems, political and social leadership is required as well. As I have suggested, the key values are ethics, openness, inclusiveness, effectiveness and accountability.

Second and related to the first, we need to establish a shared vision of what a company is for. This may require fuller engagement with a wider range of constituencies than shareholders alone, central as they are. But crucial questions are growth, sharing gains (and losses), and the company as a vehicle for change. Within reason, it may not matter exactly where the balance is struck between what I have called the competing claims on companies. What does matter is that the vision is widely shared and accepted.

Third, we need to find the voice which best conveys the shared values and vision. My definition of voice includes operational mechanisms - outside mechanisms such as regulation and internal corporate mechanisms such as the board. As I have already mentioned, we should look again at what kind of people serve on company boards, with the silent partner particularly in mind. And, in a more literal sense of voice, we need to communicate risk much better. The decade 2010 has ushered in will be characterised by how risk is understood, communicated and managed.

Indeed, communication underpins all three steps. It is little short of a scandal that expensive and elaborately produced annual reports of some institutions, which met all the required standards, apparently gave no hint that the reporting company could be bust in six months. The contrast between ticking the boxes and behaving ethically is dramatic. The time has come to ask whether the annual report - a quintessentially nineteenth century document if there ever was one - still fits the bill. Modern technology allows for the provision of real time information to everyone in almost any quantity. Would provision of such information by companies in this way give practical expression to the values I have enumerated and thereby strengthen trust?

To sum up, corporate governance for the twenty-first century will be based on shared and articulated values, which are ethical and support growth. These principles, moreover, apply to all companies, not just financial ones or even just limited liability ones.

Thank you.

©Professor Kenneth Costa, Gresham College 2010