Government must curb the corporate governance merry-go-round, says Sir Geoff Mulcahy

Government must curb the corporate governance merry-go-round, says Sir Geoff Mulcahy

The good news is the axing by the Government of more than 160 unnecessary regulations affecting retailers. The bad news is that it does not go far enough, nor tackle other areas impeding growth such as the increased burden and unintended consequences of corporate governance.

To grow, retailers are facing big challenges. Adopting new technology and delivering more value for less requires innovation.

For how long will the real incomes of many consumers keep falling and consumer confidence remain low?

Cost increases, such as the rise in business rates, changes in employment legislation and exchange rate depreciation increase the pressure. Meanwhile, the internet allows consumers unprecedented choice of both what to buy and where to buy it.

Business models need to evolve. Many are not doing so fast enough. Short-term fluctuations in consumer spending are often used to explain performance, but the real determinant of good performance is the medium-term decisions, ensuring the business is well positioned to meet the reality.

Trends are much more predictable than the short-term. It is not surprising that the luxury goods, value and internet retailers are doing well.

Over 10 years ago, it could be seen that the internet would have a major influence on the book, entertainment and electricals markets. Yet how many legacy retailers moved quickly to take advantage of the opportunity and head off the threat from competitors?

Comet was founded over 30 years ago on the principle of offering better value. Customers would typically go to the department store to choose what they wanted, look at Comet’s line list advertising, see better prices, then go to the less convenient but low-cost Comet stores to buy.

Now it finds the tables reversed. Transformational innovation is often considered high-risk, frequently having a negative impact on short-term profits. It can take years to build new skills and capabilities into the organisation, much longer than the term of usual executive incentive schemes.

Retailers, especially those with strong brands, can use short-term market fluctuations to explain performance while mitigating the gradual loss of customers through margin increases and cost decreases, until it is too late.

The corporate governance industry has been built by institutional shareholders and government, ably supported by lawyers and accountants, supposedly to improve performance and mitigate against risk. But large and small corporate failures still occur and mediocre performance is accepted.

Hugely expanded remuneration committee reports have done little to stop the growth in the gap between chief executive and shopfloor pay. Provided all the boxes are ticked, shareholders usually agree.

Is it not time that we asked whether the corporate governance regime is acting as deterrent to growth? Or should we be happy with low growth while continuing to tick boxes and provide business for the corporate restructuring industry?

If shareholders had a much better understanding of the businesses and markets into which they were investing, management could be pressured and incentivised to evolve their business model, whether or not all the boxes were ticked, and whether or not it impacted short-term profits, rather than managing market expectations.

  • Sir Geoff Mulcahy is former chief executive of Kingfisher