Directors, not shareholders, are the key to eliminating corporate wrongdoing, says Gerry Brown
It is time for the Government to take a broader approach to the initiatives considered in the current Green Paper on Corporate Governance in the UK.
A review of the many recent company corporate governance abuses quickly provides an ugly roll call that includes many of our biggest and notionally best businesses. Whether it is Royal Bank of Scotland, Barclays, HSBC, Tesco, BHS, Sports Direct, BP, Rolls-Royce, Sky, GSK or BT, to name but a few, it clearly shows that the main issues of inadequate corporate governance are much broader than just the issue of executive pay.
There is also tax evasion, bribery, corruption, accounting irregularities, price-fixing, and mis-selling to consider. All these nefarious activities and outcomes continue apace and regularly happen despite six enquiries stretching back from Cadbury to Walker and the subsequent so-called 'strengthenings' of the UK Corporate Governance Code.
It is, obviously, sensible to take notice of developments in corporate governance around the world if we are not to be left behind, especially with regard to increasing the professionalism of our boards and directors. Expecting investors to change their behaviours radically or become much more concerned about corporate governance issues in public companies in a sustainable way is unrealistic. Much of the current Green Paper is about empowering shareholders to fulfil a governance role. However, ultimately, it is better boards that will make the real difference.
Many people believe the Government's corporate governance policy needs a change of focus. Fundamentally, responsibility for the governance of companies and avoiding scandals lies with company's boards and directors, so action should be focused on how to improve their effectiveness. In this context, the current Green Paper focus is much too narrow and poorly conceived. The Government should not squander this opportunity for positive reform by focusing on some of the symptoms of the problem, but rather address the fundamental issues.
As we encounter the post-Brexit business world, UK Plc needs every competitive advantage it can find. This means any government initiative and consequent legislation should be focused on improving corporate governance performance and having the most professional boards and directors in the world.
Recently, along with Andrew Kakabadse and Roger Barker, I proposed seven much-needed, but practical, areas of early action for Secretary of State for Business, Energy and Industrial Strategy, Greg Clark (or whoever his successor may be pending the result of the election) to consider to enhance the outcomes of the Green Paper effectively.
These actions are varied and include the requirement for companies to publish their board improvement plans resulting from board evaluations. This would ensure that boards would be more committed to, for example, improving diversity and increasing training for board members.
There is an urgent need for the Financial Reporting Council to be more rigorous in enforcing the Code requirement for all board appointments to follow a proper selection process. I have campaigned for many years to introduce a very necessary, but, in this instance, welcome, Americanism into our language of business, namely changing the legal title of non-executive directors to independent directors, since this not only better describes their role but, through this act of designation, I believe, immediately better orients their activities and outlook.
The proposals the Green Paper enacts, after all relevant consultations, should include the requirement that all newly appointed independent directors attend an accredited educational training programme to cover their stewardship responsibilities in relation to the board when it comes to, for example: strategy, globalisation, risk management, the use of advisors, and the policing and supervision of their relationships with executives. Clearly this would mean all newly appointed chairs of committees, for example, of the remuneration committee, also receive appropriate training.
It is also sensible that before companies can list, the boards must be properly educated and trained in all the implications of being a listed company and the current AIM programme needs to be considerably enhanced. The Government, in partnership with ICSA, should also convene a gathering of interested parties to develop a comprehensive plan to instigate real improvement of the professionalism of board directors.
Seven recommendations
The seven much needed, but practical, areas of early action to enhance the outcomes of the Green Paper are:
- A requirement for companies to publish their board improvement plans resulting from board evaluation so they would be more committed to, for example, improving board diversity and increasing training for board members
- The Financial Reporting Council to be more rigorous in enforcing the Code requirement for all board appointments to follow a proper selection process
- Change the legal title of non-executive directors to independent directors for a better description of the role
- A requirement that all newly appointed independent directors attend an accredited training programme to cover stewardship responsibilities in relation to the board, strategy, globalisation, risk management, use of advisors and relations with executives
- All newly appointed chairs of committees to receive training, for example, the remuneration committee
- Before companies can list, the boards must be properly trained in all the implications of being a listed company – the current AIM programme needs to be considerably enhanced
- Convene a gathering of interested parties to develop a comprehensive plan to improve the professionalism of board directors.
Gerry Brown is Chairman of NovaQuest Capital Management
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