Each month we will be sharing four, carefully-chosen articles from the Latest Issue of our flagship publication ‘theHRDIRECTOR’ which exemplify the high standards we strive to archive. We hope you find this in-depth article of interest and decide to become one of our valued Subscribers.
The corporate world is scandal-strewn, and every time a new calamity arrives, as they do with predictable regularity, the press and public are angry, and politicians seize the mood music and call for “decisive action”. But nothing ever really happens and, over the years, there have been many more proposals than actions to put right corporate governance scandals at board level. What do we do? Just grow angrier and angrier?
Article by Gerry Brown, Chairman – Novaquest Capital Management & author – ‘The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence’
Behind corporate failure lies the responsibility of company boards and their blatant ineffectiveness in today’s world. A recent Harvey Nash/LBS study concluded that the vast majority of Board Directors recognise that: “Ineffectiveness in the boardroom comes at a great cost to the business be it social, environmental or financial”. And yet in terms of Board behaviour a key finding was that; “Boards have no real commitment to broadening their reach to a wider pool of talent when it comes to appointments. They are also no more likely to conduct evaluations of the Boards effectiveness”. Responding to corporate scandals by commissioning reports into corporate governance, as well as trying to define the roles of directors and non-executive directors is the British business way, it seems. Though the key issue of improving the effectiveness of Boards in preventing abuses still remains either unresolved or without effective legislative teeth, despite the impressive number of committees and reports including; the Cadbury Report (1992) the Greenbury Report (1996), the Hampel Report (1998), the Higgs Report (2003), the Walker Report (2009) and the Code of Corporate Governance (2012).
After loudly proclaiming headline-seeking proposals to force workers onto Boards, the Prime Minister has now enlisted corporate governance regulator the FRC (Financial Reporting Council) to conduct her own variation of what Fleet Street called “the reverse ferret”. In this instance to kill off the idea while appearing to investigate it, Mrs May is going with the show trial of further consultation by the FRC, in order to kill off her loud initial barks up what she nowadays views as the wrong tree of worker representation at board level. With the ratio of CEO pay to the average employee being 120:1, the proposal to require annual binding votes by shareholders to deal with the abuses of executive pay, has been ditched by the Government. The FRC of course will, in the fullness of time, just produce another report if we take the carefully chosen terms of their latest consultation as our guide to their future inaction. Not only has the FRC carefully selected placebo-style consultation options -assign non-executive director to represent employees; nominate a director from the workforce; create an employee advisory council or talk to the hand – but, worse still, there will be no legislation or effective enforcement to back up whatever options are eventually chosen from the FRC consultation, after it closed in February 2018. Advance news that the resulting code will be enforced on a “comply or explain” basis (aka companies that ignore it must provide an explanation) appears to give the green light to further board level scandals rather than actively seek to hinder them.
“After loudly proclaiming headline-seeking proposals to force workers onto Boards, the Prime Minister has now enlisted corporate governance regulator the FRC (Financial Reporting Council) to conduct her own variation of what Fleet Street called “the reverse ferret”
Rather than delay much needed culture change at board level further, what Theresa May really needs to do is co-opt a range of interested and capable parties to help her to begin to solve these boardroom effectiveness and behaviour issues .Obviously, generally UK business requires greater shareholder activism to ensure boards are held to account as well as to embrace greater diversity. If the oft-repeated mantra of corporate social responsibility is to be more than empty words and box-ticking actioned window-dressing, then businesses of all stripes need to enlist the skill, expertise, knowledge, independence and experience of human resource professionals and their HR departments. Already well-used to researching, designing and implementing step-change programmes; dealing with the staffing issues thrown up by mergers and acquisitions; delivering staff training and development as well as capably executing vocational on-the-job and/or professional accreditations, (along with truly independent minded non-executive directors) HR professionals are the logical storm-troopers, to drive and effect cultural change at executive level in the UK. Legislation is required to be enacted to ensure that in future all executive directors and non-executive directors gain formal accredited qualifications for their roles.
Additionally, in support of this credentialing, both the government and the UK university sector need to recognise that there is an urgent need for education, accreditation and further professional development at board level but also at the institutional level of the Business School curriculum – whether undergraduate, post-graduate or short-course. Making directorial accreditation more than the optional extra of a nice-to-have elective module would add further lustre, utility and impact to increasingly hard to understand, let alone differentiate between vanilla business and MBA qualifications. Indeed, it is all well and good turning out (graduates and) MBAs from our UK business schools more than able to excel as strategists, marketers, operation managers, brand evangelists and social media managers but this is not enough .While understanding the tried-and-tested tenets from the ready-drafted checklist of business success, the latest research or even exploring and then adopting the latest bright shiny fashionable management ‘thinking’ is important, it remains the sub-optimal case that pretty well all UK Business Schools and university undergraduate courses do not even cover the corporate governance basics and practicalities. Successfully educating, training and accrediting the non-executive directors (and executive boards) of the future requires actual attention and examination via the curricula. Just like artists and gifted sportspeople, the non-executive directors (NEDs) of the future need to be made rather than found.
Effectively educating the Directors and Senior Managers of tomorrow in how companies and boards should really be properly run should come fitted as standard on all varieties of business short-course, company training, undergraduate and MBA curricula. Doing so would not only help protect the revenue/profit growth of UK businesses from avoidable scandals but also generate positive spillover effects in wider society. It hardly needs to be remembered that ongoing UK corporate scandals at board level impose significant exogenous costs on us all and, of course, society generally through (for example) damaged pensions. Only this week a Financial Times leader called for a ‘Better Deal between Business and Society ‘and a CBI survey found that 68 percent of adults regard CEO’s as too far removed from the lives of ordinary people. As we encounter the post-Brexit world, U.K. Plc needs every competitive advantage it can find. Having the most professionally educated boards and directors in the world should be at the forefront of any plan for growth and competitive advantage for government but also at the educational institution course curriculum level.
It is also time for Company Secretaries and the Institute of Chartered Secretaries and Administrators (ICSA) to throw off the shackles of their antediluvian quill and ink era standards of deference and complacency when working in our twenty-first century executive suites. Currently, sadly there is no legal requirement for executive board minutes to formally record instances of substantive disagreement among directors. So, even if the non-executive directors do their job of challenging management and assessing risks, it is often impossible to tell from the written records kept or circulated. Not only will the revolution not be televised, but the body responsible for the service and standard of professional conduct of the Company Secretaries (who usually discharge the Board meeting minuting function) the ICSA won’t even deign to insist that they record or minute dissent during Board meetings unless specifically instructed to do so. The ICSA does provides comprehensive and robust training on the law and practice of meetings. They also advise and train how to take board minutes properly and effectively, so taking the simple step of legally requiring that board meetings are properly minuted seems frightening obvious and low cost.
All these steps are eminently more effective in reducing the cosy cultures and group think that so often leads to scandal. Insistence upon properly qualified directors should be part of any proper programme of action undertaken by the Prime Minister.
But back to where we came in with Theresa May and her initial advocacy of the benefits of worker representation being included in the mix of board level decision-making, whatever the FRC consultation finally ‘reveals’, the new voluntary code will be completely ineffective when it comes effecting much needed cultural change at board level unless some or all the above recommended steps are also actioned. What the FRC really needs to do is to administer some stiff medicine – insistence upon properly qualified directors should be bare minimum in any proper programme of action undertaken by the FRC, the government, Theresa May or any/all of the conscientious and effectively operating HR departments of British business.
Gerry Brown is author of The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence (Palgrave)
William Shakespeare – Macbeth*
www.theindependentdirector.co.uk
