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Across the pond

with David Anderson


David Anderson is President of the Anderson Governance Group

Powerful choices
business circumstances to warrant a uniform approach; and (3) regulatory efficacy: the rules and their enforcement efficiently and effectively direct, modify or preclude relevant behaviours. Are governance challenges in the UK similar to those across the EU? Ownership structures are certainly different. Widely dispersed ownership in the UK contrasts with block holdings commanding corporate control in the EU. Indeed, across the EU there are many governance frameworks in which the approaches taken to board structure, risk appetite, director independence and whollyowned foreign subsidiaries all vary. Can the application of an EU-wide governance framework cover the necessary range of corporate behaviours to meaningfully affect outcomes of interest to regulators? Decisions are behaviours with an ethical dimension, and as such are hard to adjudicate with fairness, particularly when rules are the standard, and so discretion is minimised. To be effective, a regulatory regime must fit its context. A one-size-fits-all regime is only appropriate when the conditions of governance homogeneity, market homogeneity and regulatory efficacy are met. In truth, looking at the EU as a single jurisdiction, these tests are not met. Even within the UK, corporate leaders make decisions in the context of widely varying governance and market characteristics. In the context of these moderate degrees of diversity, a principles-based regime has the twin benefits of being suitable in a wider range of circumstances and of permitting a wide range of corporate solutions. The consequences of the systemic risk taken by the financial services sector to some degree justifies a proscriptive approach to regulation. Yet the articulation of principles in practice is also vital. Our long-term interests are best served when business leaders are permitted to exercise judgement. Without the latitude to affect choice, there can be no responsibility. Tightening rules too much inhibits accountability. The further we walk away from this truth, the less rich and vibrant our future will be.

Rules are seductive for the power they imply.

oliticians and regulators have revisited their approach to market regulation in response to trouble in the capital markets. Yet directors and executives, at whom these reforms are aimed, complain about being swamped with regulation. British business leaders, like their Canadian counterparts, would rather see sound principles, allowing for discretion based on circumstance, than rigid rules. The EUs Green Paper (2011) on corporate governance sets out the issues that market participants and regulators will have to address in order to restore confidence. Importantly, it does so without giving answers, although prescription seems likely. Those jurisdictions given to a rules-based approach will look for the rules to be tightened. Jurisdictions favouring a principles-based approach have a choice: stick with principles or adopt a rules-based approach. The EU and the UK are at such a juncture. The consequences for decisions made now are hard to overestimate.

In Canada, large public companies many of which are listed in Toronto and New York and so face two different regulatory regimes are used to marching to two drums. Their experience is that the rules-based drummer bangs a louder drum and so behaviour aligns to its beat. Of course, significant market challenges are present under both regimes, so neither is clearly superior. However, rules are seductive for the power they imply to control market actors through explicit directives and sanctions. In practice, no regime is without a significant dose of rules; the differences are more of degree than kind. The debate over the direction regulation may take must test three assumptions. These are: (1) governance homogeneity: that the challenges faced by companies under the purview of regulation are substantially common, justifying a common approach to common problems; (2) market homogeneity: that those companies affected by regulation are similar enough in

About the author


David Anderson MBA PhD ICD.D is the President of the Anderson Governance Group based in Toronto. He can be reached at david.anderson@taggra.com and +1 (416) 815 1212.

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