Board Rules: Improving corporate governance

Apr 11, 2014

Shareholders should make up the majority of people on the committee responsible for appointing board members to improve performance, diversity and accountability of UK companies.

Board Rules: Improving corporate governance, reveals that the solutions proposed and enacted by the government to drive up the standards of corporate governance among UK companies amount to little more than, “a damp squib”. High profile failings including the inability of Non-Executive Directors to challenge Fred Goodwin at RBS or Paul Flowers at the Co-op highlight the need for urgent action.

The 2012 Kay Review rightly identified the lack of investor oversight as a crucial flaw but the proposal to set up an Investor Forum – where investors can meet to encourage collective engagement – and vague recommendations that investors be consulted over major board appointments will do little to improve the reality of the relationship between shareholders and the companies they own. Instead the report proposes major changes focusing especially on the Nominations Committee (or ‘NomCo’) – the sub-committee responsible for identifying and recommending new board members.

Crucially it suggests that investor representatives should be appointed to the NomCo. There should also be a blanket ban preventing chief executives sitting on the ‘NomCo’, while Chairman of companies should not be allowed to also chair the body responsible for appointing board members. Currently 94 Chairs of FTSE 100 companies also sit on the ‘NomCo’ with 91 of those individuals going on to chair the sub-committee, while 15 CEOs sit on those NomCos at the moment.

The report also recommends:

  • Non-Executive Director recruitment should become more professional and standardised including psychometric testing as routine. Executive Search Firms should have a target for searching for people outside the corporate mainstream. This would ensure that those with the right skills and experience are no longer over-looked. Non-Executive Directors should have a greater level of technical and financial expertise to cope with increasingly complex companies.
  • There should be more emphasis on diversity of skills, rather than gender diversity. Annual reports should contain a short statement on what skills and experience each Non-Executive Director brings to the board, rather than focusing on how many women have been appointed.
  • Guidelines should be established on standard practice in board evaluations and a Voluntary Code of Conduct for board evaluators should be drawn up. Non-Executive Director pay should form an automatic part of a board’s evaluation and the FRC should publish average pay levels across industry sectors to increase transparency.
  • Board meetings should become more focused, with time split between the supervision of management and strategy.  Board packs must be concise and provide board members with both a detailed and holistic view of the business. The board should be able to reject a board pack if they do not think it adequate.The ‘NomCo’ should review the board minutes to ensure that bother strategy and management review are given equal weighting.

Author

Emily Redding

Emily Redding
Business Forum Manager, 2011-14 and Financial Policy Research Fellow, 2013-14 

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