Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment

The UK has, similarly to the US, deep and liquid securities markets and widely-dispersed ownership of publicly-traded firms. The central problem of corporate governance for publicly-traded firms in the UK is rendering managers accountable to shareholders. My recent paper, entitled Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment, provides a roadmap of the enforcement strategies employed in UK corporate governance, and a first approximation of their empirical significance.

Enforcement strategies affect agents’ incentives to comply with substantive rules, and so the effectiveness of a regulatory regime is a function of both substantive rules and the strategies by which they are enforced. While recent scholarship has begun to address enforcement-related issues, no clear consensus has yet emerged, as the results seem sensitive to the way in which ‘enforcement’ is measured. Moreover, those studies that have been done have focused on formal (court-based) mechanisms of enforcement. There are, of course, a variety of other ways in which the agency problems at the centre of corporate governance can be kept in check—from quiet intervention by a regulator to the threat of a shareholder revolt. The impact in practice of a corporate governance regime on agents’ incentives is therefore the sum of all institutions—formal and informal—that may impose a sanction on agents for inappropriate performance. Such institutions vary across countries, and so studies that focus solely on court-based enforcement risk misleading comparisons. Of course, this point isn’t new. The challenge is how to identify these modalities and measure their intensity in a meaningful way. This paper offers a first cut at the problem in the context of the UK.

The results suggest three stylised facts about the UK corporate governance system. First, shareholder lawsuits are conspicuous by their absence. Formal private enforcement appears to play little or no role in controlling managers. Secondly, it is public, rather than private, enforcement which dominates in relation to listed companies. However, the lion’s share of the interventions by the relevant agencies—the Takeover Panel, the Financial Reporting Review Panel, and the Financial Services Authority—is of an informal character, not resulting in any legal action. Suasion, rather than sanction, is the order of the day. Thirdly, a simple divide between public and private enforcement fails fully to take account of the role played by institutional investors in the UK, who have engaged systematically in informal private enforcement activity. Strong informal private enforcement has historically therefore been the flipside, in the UK, of weak formal private enforcement.

The paper is available here.