Marks & Spencer recently caused an outcry by appointing Sir Stuart Rose as both chairman and chief executive, flying in the face of accepted best practice. Was the move justified, or a backward step for corporate governance in the UK?

Corporate governance in the UK's largest companies is generally characterised by polite, private conversations. But this gentlemanly facade has collapsed in recent months, in the face of a full-blown row, complete with confrontation in the media, mutual posturing and some pretty strong language.

The unlikely adversaries were Britain's bluest of blue-chip retailers, Marks & Spencer, and several of its shareholders, including fund managers Legal & General, Fidelity and Schroders.

The furore began in February when M&S declared its intention to appoint its chief executive, Sir Stuart Rose, to the combined role of chairman and chief executive for up to three years, a move that bucks a strong trend in the UK to separate the roles—and which fails to comply with the Combined Code on corporate governance.

It is a cornerstone of the Code, which applies to the UK's listed companies, that the chairman should run the board, which sets strategy, while the CEO runs the organisation and focuses on implementing the strategy through the company's operations. The board should be balanced and not distorted by centralising power in one individual.

M&S might have known there would be trouble. The company has had a series of boardroom bust-ups stretching back to the departure of former chairman and chief executive, Sir Richard Greenbury, in 1999. But it clearly misjudged the strength of City feeling. Legal & General Investment Management, the largest UK investor in M&S with five per cent of its shares, led the protests.

M&S fought back. Its current chairman Lord (Terry) Burns and deputy chairman-elect Sir David Michels met L&G in March to justify Sir Stuart's appointment to the dual role. Their argument was that it would allow time for a new CEO to be identified from within the company.

It didn't wash. "While we understand their arguments we do not agree this is a necessary structure to allow for the successful appointment of a successor to the current CEO," read a terse L&G public statement. "We do not support a dilution of corporate governance standards, particularly in leading UK companies."

Other investors went further. Richard Buxton, head of UK equities at Schroders, claimed M&S was setting "an appalling example". He argued it would result in an undue concentration of power, with insufficient questioning of the company's strategy at a time of poor trading. Buxton even seemed willing to contemplate Sir Stuart's departure.

But with Sir Stuart widely credited with turning M&S around after several lean years, he was not without support. Former chairman Paul Myners rallied to his friend's defence, as did another major shareholder, Invesco Perpetual. Last month the company launched a charm offensive, explaining to its City critics that combining the roles was in its best interests as it would retain Sir Stuart in the business. Sir Stuart described himself as "chief cook and bottle-washer" in the M&S boardroom, adding that "the board is paid to make the right decision, it is not paid to make popular decisions". But the board also made concessions, offering new checks and balances to mitigate shareholders' concerns. These included putting Sir Stuart up for re-election every year and identifying a new heavyweight non-executive director, who would eventually succeed Sir David Michels in his current role of senior independent director.

Although M&S's explanation had been brief, there's little doubt the company acted within the letter of the Combined Code by explaining its decision not to comply with a code provision (see "Breaking the code" below). But critics argue that it should simply have complied, while others might have been mollified by a more thorough initial explanation.

"Consultation and explanation can make a real difference," says Martin Webster, a partner at law firm Pinsent Masons. He points out that all major institutional investors now employ corporate governance experts who are quick to highlight real or perceived non-compliance with the Combined Code. "But the absolute requirement for shareholders is to show a return on their investment," he observes. "Any board in breach should get its major shareholders on side in advance."

Neville Bain, chairman of the IoD, won't comment specifically on M&S, but says that the Code is clear and correct in setting out the standards it expects, but leaving open the comply or explain option. "There are times when a company needs to explain why it is in its best interests not to comply," he says. "Typically this would be to cover a short-term specific issue where time might be needed." Bain says that those in favour of combining the roles usually point to the need for strong unified leadership in challenging times or in times of significant change. "In my view it should be a temporary situation and with a very strong senior non-executive director who will take on additional responsibilities. In a well ordered organisation, succession planning would normally be in place so that combining the chairman and CEO roles would be unnecessary," he adds.

Critics of M&S have also been quick to contrast the civil service background of outgoing chairman, Lord Burns, with the strong City credentials of his predecessor, Myners, a former fund manager who was acutely aware of how to handle investor relations. Statistics don't help the retailer either. A survey last year of the top 150 UK firms by the executive search specialists Spencer Stuart found just three examples of a combined chairman and CEO. They included cruise company Carnival and satellite communications provider Inmarsat, both global businesses, run by Americans, that have adopted US-style governance that allows combining the roles. The third case was media firm Emap, where the measure was temporary in the run up to its recent takeover.

Outside the UK's quoted sector, thousands of small and medium-sized enterprises (SMEs) combine the role of chairman and CEO. The majority are founded by entrepreneurs, who are likely to be both owner and manager. SMEs are beyond the reach of the Combined Code, but Bain argues that good corporate governance is still important.

"In smaller companies it is legitimate to combine the roles, but they will benefit from having independent input from non-executive directors who bring a wider perspective," he says. "Family companies are increasingly recognising this and those that are considering listing will prepare for this by getting balance on the board. There may be a mentor to the owner manager who, if well chosen, can make an important contribution to the team."

Webster reckons corporate governance can be "ropey" on the AIM market, but that cases of the combined role in the FTSE-100 are old: "The UK's business culture has changed, and boards have changed too." The question remains whether the M&S saga has been a backward step for UK corporate governance, or a justified exception that proves the rule of the Combined Code. Who better to comment than Sir Adrian Cadbury, author of the original 1992 Code?

"I have never given an opinion on the present Combined Code," says Sir Adrian. "Equally, I have been approached by investors on Rose's appointment and have told them they must make up their own minds."
And so, it would appear, must we.

Breaking the code

The Combined Code is divided into three sections—main principles, supporting principles and code provisions. The first two are included in the listing rules of the London Stock Exchange and are therefore mandatory for all companies listed on the main market. Code provisions are not compulsory, but are subject to the rule of "comply or explain". This means that when the board of a company does not wish to comply with a code provision, it must set out its arguments to shareholders in advance.

It is only as a code provision that the issue of combined roles is specifically addressed, as follows: "The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board."

While they are compulsory, the main and supporting principles use "woolly" language that makes compliance relatively easy. Conversely, while the wording of code provisions is precise, companies are not bound to comply with it. All of which allows firms a certain amount of wriggle room.