Keith Johnstone and Will Chalk

companies and other advisers, not least lawyers, in relation to both cannot be discounted;

Company Secretaries – in addition, given the qualifications required to hold the position in a public company, the influence of Company Secretaries on boards should not be underestimated.

Good corporate citizenship in the Virtuous Circle

Good corporate citizenship encapsulates many concepts but the prime driver behind it is public opinion, which plays an important role in conditioning board behaviour. Hence it is properly included in the Virtuous Circle. Predominantly, the agents applying pressure in this area are:

the press – in a decade marked by volatile equity markets where the merest hint of scandal can have an impact on share prices, adverse press comment plays a part in compelling compliance with governance best practice as well as exposing malpractice;

lobby groups (including trade associations) – the pressure applied to many segments of the Main Market by, for instance, the environmental lobby and the weight of opinion generated by the debate surrounding globalisation and the need for corporate social responsibility underline the influences at work here;

peer groups – the high degree of segment-based analysis undertaken in the market means that peer pressure (ensuring that companies are seen to be keeping up with the corporate governance standard-bearers in their segment) also plays a part in the Virtuous Circle.

The sanctions: law and regulation – policing the boundaries

Law and regulation set the boundaries of behaviour within which companies and their directors must operate and constitute one of the two key segments of the Virtuous Circle. Strong legaland regulatory-based sanctions are necessary to ensure that these boundaries are secure, that companies and their officers are deterred from crossing them and that those that do are punished effectively and appropriately. Having secure boundaries should allow much of the rest of the corporate governance regime to be determined by voluntary and flexible codes of best practice, policed by shareholders. That, at least, is the theory.

Problems can arise in legislative responses to corporate scandals. The understandable, knee-jerk political reaction to the collapse of major corporations, such as Enron, is to legislate and demand immediate compliance with more rigid rules enforced by an objective and risk-averse organ of the state. However, the inflexible nature of such laws, coupled with the cost of compliance, has the potential to downgrade the attractiveness of a jurisdiction for business and investment.

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