THE PROBLEM

The board of UBS has come under increasing pressure to replace its long-serving executive chairman, Marcel Ospel. The Swiss bank has suffered the worst losses of any European bank following the subprime market collapse, writing off $18.4bn (£9.1bn) (€11.9bn). Unlike Stan O’Neill at Merrill Lynch and Chuck Prince at Citigroup, who left following subprime writedowns, Mr Ospel has vowed to stay on – despite drawing criticism from shareholders at an emergency meeting last month. How should boards react when senior executives come under fire from shareholders for poor performance? Does the need for strong leadership in times of trouble outweigh the need for executives to bear responsibility for their strategies?

THE ADVICE

THE EXECUTIVE
Sir Adrian Cadbury
The UBS board must have known for some time that they face a major write-off in this year’s accounts. Even if unaware of its extent, they will, it is hoped, have ascertained where accountability for the losses lie and decided on the actions needed to prevent future embarrassments of this order.

Equally, the reaction of the shareholders was predictable: fire the chairman since the board is ultimately responsible, tighten up risk controls and perhaps sue the auditors for good measure.

This the board must have foreseen. The moment they had decided what changes in people and processes they had to make, they should have engaged with those of their institutional investors with whom they are in regular touch. They have to convince them that what they propose will set the company back on course, but they also have to listen to what some of these big shareholders believe is necessary to restore trust in the governance of the company. Following that dialogue, the board firms up the proposals it will put to the general meeting. The board as a whole has to be convinced by those proposals, if it is to carry the shareholders and then be prepared as a body to stand or fall by them.

The writer was chairman of the UK Committee on the Financial Aspects of Corporate Governance

THE ACADEMIC

Colin Mayer

Despite being the centrepiece of corporate governance reforms, there is a striking lack of evidence that non-executives do much to correct corporate failures. Even in the worst performing companies, the presence of non-executives is not associated with significantly higher turnover of chief executives or chairmen. This reflects the ambiguous role of non-executives in offering advice to failing executives rather than sanctioning them.

In general, CEO and chairmen have more to fear from outside than inside the company. In a takeover, typically 50 per cent of a board disappears within two years of the bid. Alternatively, an activist fund can be an effective source of managerial discipline. They may be backed up by the threat of a coalition of institutional shareholders voting with their hands rather than their feet at shareholder meetings. Failing that, a financial crisis may allow investors to make the provision of further financing conditional on board changes.

Should non-executives be more active? Yes, but the dynamics of boards mean that it is only when their own jobs are threatened by external mechanisms that non-executives spring into action.

The writer is dean of the Saïd Business School

THE CONSULTANT

Joel Kurtzman

The best boards hold CEOs accountable for results, strategy, operations, people and risks. What boards must never do is allow a CEO to become a scapegoat for a short-term problem when everything else is working well. At UBS, Marcel Ospel is facing a $18.4bn write-off. In making its decision on behalf of shareholders, the board must delve into whether adequate risk management practices were employed and whether the right people and strategies were in place. If everything was in order, then UBS’s write-offs were the result of external forces, like a rating agency failure. If so, Ospel should keep his job. If not, he must go – along with directors who were supposed to oversee him.

The writer is former editor of Harvard Business Review and co-author of Global Edge: Using the Opacity Index to Manage the Risk of Cross Border Business

THE DIRECTOR

Neville Bain

The primary responsibility of the board is to act in the long-term best interests of the company. Where the issue is a worldwide or industry-related one, it may not be appropriate to respond to pressure to let the most senior executive go. However, if criticism spans the shareholder base, it is damaging to the company for the chairman to stay on, save for a brief period. The board needs to address a number of issues. First, is the balance on the board appropriate and refreshed with new talent? Is the senior non-executive director counselling the chairman and taking soundings directly from shareholders? Second, high-level succession planning is clearly vital as a board process. Third, effective risk assessment and control processes allow companies to spot new risks as they form and take steps to mitigate them. This process is not a box-ticking one; rather it is a value-adding role.

The writer is chairman of the Institute of Directors and author of The Effective Director