December 11, 2013 4:36 pm

Think-tank searches for good governance

Board Intelligence, a firm specialising in board information, is holding a series of debates called “The Board is Dead, Long Live the Board”. Participants (who are not named) are asked: “If you could rip up the rule book, what would good governance look like?”

Executive Appointments is publishing the most notable findings from each meeting.

Published April 10

Even sophisticated technologists can be overwhelmed by the growing power of social media. That much should be clear from the disarray at Mozilla, the open-source software company behind the Firefox web browser.

Boardroom decisions may apparently be taken in lofty isolation, but people’s responses to them are instant, forceful – and, well, open-source.

The Mozilla board took a big risk appointing Brendan Eich (pictured) as chief executive late last month.

It had been public knowledge since 2012 that, he had donated $1,000 to a 2008 campaign opposing gay marriage in California. To many of west coast’s liberal techies this was unacceptable.

Some board members seem to have spotted the danger; three quit around the time of Mr Eich’s appointment. Mozilla says the moves were unrelated.

But unhappiness in user groups and among Mozilla developers grew quickly. When the dating website OkCupid asked its customers to stop using Firefox, the momentum against Mr Eich became unstoppable. Last week, he resigned.

How can a board get a decision like this so badly wrong? The new chief was an admired technologist, responsible in no small part for the company’s success. As one of Mozilla’s co-founders and the creator of JavaScript, Mr Eich had the right CV and was a known commodity.

Brendan Eich, chief technology officer and senior vice president of engineering for Mozilla©Bloomberg

Brendan Eich: resigned

What the board clearly misunderstood, or failed to appreciate, was how provocative – offensive, even – elevating him to chief executive would be. Boards are supposed to understand their stakeholders. At least some of the outraged reaction could have been predicted.

Once a decision has been taken the emotional investment in it can override more rational calculations. Owning up to mistakes is humiliating and can be career ending.

This tale also reveals something about how badly prepared boards can be for crises. At a recent discussion at the Board Intelligence consultancy, one company chairman admitted that boards were often quite unready for this sort of event.

Crisis management is different from PR management,” he said. Some problems cannot be spun away. Social media has completely changed the nature of the job.

“You can’t control the flow of information,” this chairman added. He recommended that boards carry out a “walk through” of various crisis situations in an attempt to prepare for the worst.

He also made the point that more diverse boards, containing people with experience of working in NGOs and not-for-profits, would better equip companies to deal with the sort of popular protests and consumer activism that are regular features of the non-commercial world.

There should be creative tension in a boardroom: cohesion between people who know each other well, work effectively together and share a similar goal; but also “challenge” – objective criticism and testing of assertions, ideas and proposals. Until there has been disagreement, nothing should be agreed, as the management writer Peter Drucker said.

But even board diversity has its limits. Mozilla’s owner is a not-for-profit and its executive chairwoman – who announced the reversal of Mr Eich’s appointment – is a Mandarin-speaking trapeze artist.

The writer is a visiting professor at Cass Business School, London

Published April 3
Is the glass half empty or half full? Progress has clearly been made towards the UK government’s target that one in four members of FTSE 100 boards should be women by the end of 2015.

Three years ago, women occupied little more than 12 per cent of the board seats at the UK’s biggest companies; now it is one in five. Lord Davies of Abersoch, who set the 25 per cent target in 2011, says the voluntary approach is working. But the threat of quotas has hung over boardrooms ever since the target was set, and continues to do so.

The headline figures do not in any case tell the whole story. As Susan Vinnicombe, director of the Cranfield International Centre for Women Leaders, explains, women are not being appointed to very many executive positions.

“They currently hold the highest number of non-executive director positions (NED) ever at 826 and the lowest number of executive director (ED) positions ever at 291,” she says.

“The likelihood of women being appointed to ED positions is decreasing. While it is important to meet the 25 per cent target, we need sustainable change that will ensure diversity on our boards in executive positions as well as NED roles.”

Meanwhile, two companies in the FTSE 100 and 48 in the FTSE 250 have no women on the board at all.

The attempt to meet the 25 per cent target has had some perhaps unintended consequences. “I feel this issue has been rammed down people’s throats,” said one (female) executive at a recent discussion held at Board Intelligence, the consultancy. She felt sorry for (some) male directors.

More women have been appointed, she said, but had diversity really been boosted by the arrival of what this person called “men in skirts”? True diversity means engaging a wider range of people with different views and experiences.

Headhunters suggest a few women have picked up more than one NED role, meaning that not many new people have been able to rise to board level.

And has there been a large build-up of female executive talent just below board level, ready to rise to the top? It does not look like it.

Little will change until more women take up a bigger number of senior executive roles.

Quotas are still on the agenda. In several European countries – Norway, France, Spain, Italy and now Germany, among others – governments have set mandatory targets, usually well above the UK’s “voluntary” 25 per cent figure.

Quotas remain controversial, seen by some as patronising and unhelpful to women who believe they can and will rise on merit alone.

But, without ambitious and challenging quotas, things move slowly.

“I don’t like quotas, but I like what they do,” Luxembourg politician and EU justice commissioner Viviane Reding often says.

The UK’s progress to something nearer equality of opportunity for women has been steady, but unspectacular.

So, what about that glass? At present UK boardrooms are not even a quarter full as far as women are concerned.

The writer is visiting professor in management practice at Cass Business School

Published March 20

When Euan Sutherland resigned as chief executive of the Co-operative Group this month, he declared the organisation to be “ungovernable”, writes Stefan Stern.

It was a remarkable statement from someone who was being paid a lot of money to lead and help to govern.

The trouble started – as it often does – at the top, with the Co-op’s unusual quasi-democratic structures. But even in the more clearly regimented and certainly less democratic world of the plc, governance remains a constant challenge.

And getting relationships right at the top is no easier even in a world in which quarterly financial reporting – and codes of practice on corporate governance – might seem to impose certain disciplines.

This is a theme that has emerged in a couple of recent “think-tank” sessions at Board Intelligence, the consultancy. Some directors discover themselves to be ill-equipped on their arrival in the boardroom.

“There is no good preparation for this role,” is the blunt admission of one executive who has sat on several boards internationally.

His point was that a seat on the board may be offered on the back of commercial success in one particular part of the business, but that at the highest level a more rounded perspective and experience of the business – and of the world – would be useful.

In this director’s view, the lack of training and preparation for life on the board, whether as an executive or non-executive, made the job a lot harder. While the conversation at board level should involve “constructive dissent”, based on good information and understanding, this was not always the case.

What you want is “a professional debate”, he says. But instead, what you sometimes get is simply ungovernable.

A seasoned headhunter points out that some new entrants to the board, especially in non-executive roles, misunderstand the job they are being asked to do. They have taken the role on after a career as an executive, and are too “hands on” in the non-executive position.

“They are too energetic when they join a board, and are disruptive,” he says. “Directing is not the same as managing. They fail to grasp the difference.”

Some aspiring chairmen tell him, “I want to sort everything out!” This is not necessarily the right tone to adopt, the headhunter observes.

Another lesson from the Co-op’s recent difficulties is that boards are often not well prepared for crises.

“This is a new risk area,” one company chairman comments. “Has the board done a walk-through of a crisis situation? Crisis management is different from PR management,” he says.

Another way of preparing for crisis is to establish a more diverse board.

“The wider the culture, the better,” one chairman says. “A robust board is ready for crisis.”

Well, you would hope so. But in business, as in life, the unexpected does seem to keep happening.

“Boards are a collection of people – it’s all about people,” one company chairman remarks. Indeed. That is where the problems start and, with any luck, end.

The writer is visiting professor in management practice at Cass Business School.

Published February 26

Every board member should take a turn at being the chairman. This was one of the corporate governance ideas that emerged from a recent think-tank debate, attended by 35 participants.

Being chairman heightens the sense of accountability, it was argued, and “passing the baton of chairmanship” in rotation would improve every non-executive’s sense of responsibility to the company.

Another suggested advantage is that it would enable meetings on different subjects to be chaired by the most appropriate board member. One said: “Different topics demand different styles of chairmanship: a meeting to formulate strategy requires a chairman who creates an inclusive and trusting environment in which to share ideas, whereas a meeting with a heavy agenda of relatively administrative items requires a highly disciplined chairman who can marshal the board through without too many diversions.”

Many at the debate were also suspicious of “impenetrable briefings from management”, with one participant suggesting they should be replaced by short videos: “The answers a non-executive is really trying to glean from a manager’s report can sometimes be addressed better by seeing the whites of the author’s eyes and assessing their body language.”

Several speakers suggested report writers should be given feedback to help them improve the briefings. “Many authors will be middle-managers who have no contact with the board and have no idea if their report was well or badly received – or how to improve,” said one.

A subsequent round-table debate with four participants agreed that “bloated and long-winded” annual reports can leave the reader uninformed. It was agreed that a single page outlining strengths, weaknesses, opportunities and threats would require the board to make a judgment as to what really matters.

Concern was also expressed that the growing pressure for all board members to have sophisticated financial skills is narrowing the pool of potential non-executives.

One said: “The old-boys’ network may not be the dominant club any more, but that doesn’t mean we have diverse boards. Instead, we have the emergence of the professional non-executive class who bring a lot of relevant skills and experience to the table – but not diversity.”

It was suggested that boards acknowledge this deficiency by inviting “guests” to challenge the board as an observer and provocateur, without requiring that they be a director.

“At our financial services firm we have a committee of under-21s, to help reconnect the business and the board with the emerging needs of the next generation,” said one participant.


Debates 33 and 34

A recent session, involving seven young people with varying degrees of knowledge about boards, focused heavily on the wider responsibilities of companies and boards.

They agreed that corporations need to do more than maximise profits and shareholder returns.

The participants – including an AS-level student with no experience of boards, a 17-year-old non-executive director and a 30-year-old with no board or senior executive experience – called for a revision of economist Milton Friedman’s definition of business, which sees its one and only social responsibility as using its resources and engaging in activities designed to increase its profits, so long as it stays within the rules.

One said: “This thinking permeates boardrooms today – but it needs to be revised. Today’s generation is acutely aware of the corporation’s role in, and debt to, society – and boards should display an appreciation of this.”

Another added: “Just as some public sector boards have an open-door ‘public meeting’ policy, companies should open their boardroom doors. Interested parties would be able to sit in on the board meeting and – while staying silent – their presence would act as a reminder to the board of their responsibility to society.”

It was pointed out that there would be problems regarding insider and competitor information but the participants agreed the principle would be worth exploring.

Another suggestion was that boards should use proportional representation to reflect the organisation’s stakeholders, such as staff, suppliers, local representatives, etc. Non-executive directors should be specifically appointed to represent these groups.

An alternative would be make the business engage with stakeholder advisory groups, which could act as a sounding board for the main board. One said: “If such an idea proved successful, perhaps non-executives could be scrapped altogether – leaving the executives to liaise with the stakeholder and shareholder groups directly.”

The young participants agreed boards needed to “get with the times” and engage with social media. “Social media is only becoming more influential: boards would do well to accept and embrace it, rather than begrudge and resent it. Boards should be educated about the merits of social media and the rich insights that it can provide,” said one.

Social media could be one of the means used to increase communication within a business and with wider society. One said: “The work of the board is often invisible. I had to Google what a board was there to do in order to prepare for tonight. I’ve been in business for nearly 10 years, but I’ve had no interaction with any board.”

Debates 31 and 32

London’s “brand” as a business centre and the reputation of the London Stock Exchange could suffer if the corporate governance principle of “comply or explain” is undermined or abused by international corporations operating and listed in the UK.

This was a warning made at a recent think-tank session that dismissed the idea that businesses should comply with the governance code or explain why they have not as being “noble but not realistic”.

One said: “The UK model of governance operates on the ‘gentleman’s understanding’ that with freedom comes responsibility. But ‘English gentlemen’ do not necessarily inhabit the boardroom and as we open up our markets to international companies and internationally diverse leadership teams, this understanding cannot be assumed.”

The group went on to consider the idea that “gender myopia” had “hi-jacked the wider diversity debate”. The participants agreed it was also important to consider generational diversity, to gain different perspectives and nurture tomorrow’s leaders, and geographical diversity, because in a low-growth environment UK companies must think globally.

They agreed boards should have a better sense of what is going on in their organisation and become “more visibile so that they can set the tone of the organisation”.

This role should extend to educating the public as to the value of business and its contribution to the economy and society. One said: “Boards should recognise the shadow they cast over their company and society.”

The growing gulf in pay between workers and executives was highlighted as a problem at a subsequent gathering. But one participant said: “The people with the power to close this gap are unlikely to use it. It takes a brave, foolhardy and non-shareholder-focused chairman to stand up to a superstar.”

Concern was expressed that in a global market, local measures to curb executive pay risked causing a “brain drain”. One added: “We would need all the remuneration committee chairmen in a sector to band together, since it’s unlikely an entire generation of executives in one industry would up sticks and go. But it’s also unlikely that committee chairmen will do this.”

Others offered hope that the next generation might solve some of the pay problems. One said: “The next generation have watched their parents pursue money ahead of health and happiness – and they don’t want to follow suit. They are motivated by more than personal wealth – it’s no longer fashionable to earn big bucks in a bank; it’s far more cool to work for a social enterprise or start-up.”

Debates 29 and 30

A gathering of chief financial officers listed only two reasons for board failure: a lack of honesty, or undisclosed self-interest.

One participant said: “We have invested in more than 40 businesses since we set up our private equity firm – all of which are distress turnround situations. And yet only three have failed under our watch. Where we failed it was because of a lack of honesty, undisclosed self-interest – in essence, poor information.”

A “declaration of interests” at the start of every board pack to encourage conflicts of interest to be brought to light was recommended.

Another chief financial officer saw the value in board meetings, saying: “Boards are good for you. A lot like the dentist: you may not look forward to your next board meeting, but you know it does you good.

“We didn’t have any non-executives on our board until recently so we can see the impact: they bring external insight and hold us more accountable than we were able to hold ourselves.”

But concern was expressed that too much governance stifles growth and boards were criticised for too heavy a focus on supervision. One said: “Boards are meant to manage risk, not eliminate it. Investors build in a risk premium to the shareprice – they are comfortable with an appropriate level of risks – the board should be too.”

The finance officers were also suspicious of large board packs, saying they meant either that non-executives did not trust the managers and wanted to see source data, that executives were burying key points; or that management was not clear on what the key points were. They agreed a bigger board pack tended to mean poorer company performance.

Two recurring themes during the meeting were warnings that rules can be used to hide behind and that persuading good people to take a seat on the board of a financial services business is difficult, especially since the introduction of criminal legislation.

A subsequent meeting of chief risk officers identified ways in which an obsession with rules could undermine risk management and provide a false sense of security. They agreed that too much data could crowd out discussion of real risks.

One said that too much data could become “a comfort blanket – making it look as though the subject had been adequately debated when the sheer weight of information had, in fact, got in the way”.

Another attendee suggested that non-executives should be full-time so that they could acquire sufficient knowledge to challenge executives on a broad range of risk issues, including audit. He described this as “disruptive Intelligence”.

Debates 27 and 28

Stressing the importance of company boards can weaken the sense of accountability among management and staff, according to participants in a recent debate.

They agreed there is a strong case for saying an organisation lives or dies by the actions and inactions of its management team, rather than the board, and that employees were a better indicator of how a company is run than scrutiny of the board.

An alternative boardroom model was suggested, drawing on the way some executive committees operate, where the chief executive seeks consultation rather than consensus. Perhaps the chairman could have a similar function.

This might also reflect the reality of the near-impossible task faced by non-executive directors. One participant said: “A non-executive is on a hiding to nothing – and to do the job properly, they need smaller portfolios and better pay. When things go wrong, they can expect to be tried in the court of public opinion.”

It was argued that this is becoming such a trend that many talented candidates are no longer willing to take on the role. “I wouldn’t take a non-executive role in a big and complex global bank. The mismatch between what you are accountable for and your ability to affect it is enormous,” one commented.

“To do the job of the non-exec properly you have to get out of the boardroom and into the organisation. You have to experience the business for yourself and not just take management’s word for it.”

There were also complaints about the amount of time required to do the job of the non-executive: “It’s not 12 days a year at £1,500 per day – it’s at least 30 days. Given the opportunity cost of what an accomplished person could be doing with their time, and given the risk you carry as a non-executive, why do it?”

If we don’t go so far as to rip up the governance rule book, at least we should make it shorter, they agreed. Rules will always have unintended consequences and breed perverse outcomes – and fear of falling foul of the rules can lead boards to document as little as possible to maintain “plausible deniability”.

At a subsequent debate it was proposed there should be a register to name and shame – and praise – the performance of non-executives. At present, shareholders’ opinion of a non-executive and their decision on re-electing them is based on gut feeling. A public register would be helpful in forming a judgment, listing statistics about the number of boards the non-executive is on, the time they allocate to each and notable events that took place on their watch

There are chairmen with such large portfolios they could not possibly allocate sufficient time to each board, they argued. A public register would make this much more transparent.

Debates 25 and 26

The five chairmen and chief executives attending a recent think-tank discussion accepted that even improved boards cannot prevent all corporate crises and expressed concern at this overly “defensive” role. They argued that “stopping bad things happening” must be tempered by helping “good things happen”.

The participants agreed that non-executives must have the confidence to challenge the chairman and chief executive. One said: “Having sat on the board of my employer as an executive, I have come to the conclusion that it is a hopeless role. When the chief executive is sitting opposite, it is fairly obvious how you’re supposed to respond to the question ‘what do you think?’.

“Board meetings are not a good use of time. We don’t question why we’re doing what we’re doing.”

The group concluded that “small is beautiful: small boards, small briefing packs, small agenda, small rule book”.

At a subsequent dinner, also attended by chairmen and chief executives, a call was made for boards to be more realistic about their limitations and to be more discerning about where they focus their efforts

For example, boards attempt to scrutinise specific investment decisions when the information they can absorb and the time available for discussion mean substantive challenge or insights are unlikely.

On the other hand, it was pointed out that boards are also held liable for the detail as well as the big picture. Even so, attempting to meet these conflicting responsibilities by “clogging up the board agenda with too many matters to explore properly” cannot be the answer, they agreed.

The participants argued that the governance rule book is ineffective and that boards should instead be subject to an annual review of their effectiveness.

A need for “better memories, rather than better rules or regulations”, was stressed and the recommendation that non-executives should stand down after nine years was criticised for institutionalising the short-term memory of the boardroom.

One said: “When our bank repeated its mistakes from the early 1990s, it wasn’t the bank that suffered from amnesia – it was just the board.”

The chairmen and chief executives concluded that UK business suffers from a short-term “sell-out” culture. It was argued that in the US, business leaders who are successful will strive to be yet more successful and in Germany, successful businesses are nurtured for the next generation. But in the UK, business people aspire to have just enough to “retire to the Old Rectory”. One said: “We lack the ambition – or greed – of the Americans and we don’t feel the duty of the Germans. We need to raise the level of ambition – and sense of duty.”


Debates 23 and 24

Boards are failing at strategy and becoming increasingly focused on costs, according to a think-tank debate attended by chairmen. One said: “We need the conversation in the boardroom to be two levels ‘higher’. Many of our largest companies are sitting on cash and they need to get back to strategy and invest in the future – or there won’t be one.”

It was suggested that advisory boards, unfettered by concerns of liability and governance, might be better at tackling strategy – and might attract creative people who would otherwise be put off joining boards by the burden of governance.

The chairmen also asked whether more of a board’s work could be handled by committees, as they can be more focused and effective.

They also questioned whether age and experience should continue to take precedence over training and education when appointing board members. One view was that boardroom skills are becoming more specialised and need to be learned.

Regulators came under fire from the chairmen. They were accused of not understanding the businesses they are regulating and of treating non-executives as executives.

The meeting also referred to the spread of regulation from the financial services sector. One said: “We have a two-tier corporate world: financial services and the rest. But what starts as regulation of financial services bleeds through to the rest.”

The participants warned that because boards are out of touch with society, there is a danger of a backlash and the emergence of an “anti-business” movement.

The relationship between society and business was also raised at a subsequent debate. One view was that the future of the corporation depends on it being redesigned and finance returned to its proper, subservient role of supporting the wider economy.

All businesses should demonstrate public benefit – just as charities have to show a public benefit in return for charitable status, businesses should do the same, perhaps in return for limited liability status.

Another view was that voluntary sector leaders should be encouraged to join corporate boards, because of their specific skills, including in reputation and risk management.

Participants went on to call for younger, more vibrant boards. “You should see the faces of the future – not just the past,” said one. The concern that young executives are too busy to join boards was rejected and some chairmen were blamed for claiming to support diversity of age but then not allowing their executives to join someone else’s board.

It was also argued that businesses and boards need permission to fail. “What business or person can achieve great things without the possibility of failure?” one asked.

Debates 21 and 22

Governance has lost its way in the public sector, according to a think-tank debate focused on public bodies.

One participant said: “The public sector is teeming with rule books. I want a bonfire of the lot of them. They are written by people with no experience of being on a board nor experience of the services we deliver.”

Often thought of as an organisation’s “critical friends”, non-executives in the public sector were criticised during the meeting for placing too much focus on the ”critical” aspect, and not enough on being “a friend”. They need to bring instinct and experience – data cannot provide every answer, and a good non-executive must apply judgment, they agreed.

Boards were criticised for being too formal, but it was also argued that the pay is poor and they are often held accountable for things they cannot have known about. Liability should sit squarely with the executive, the participants agreed.

The need for boards in the public sector was also questioned, with one saying: “What we need is ‘radical transparency’.” This would involve organisations publishing everything, making “the world your watchdog”.

But the meeting concluded on a pessimistic note. One said: “I fear that even if we ripped up all the rules, within six months the next scandal would break and yet another wave of rule making would follow.”

At a subsequent dinner, attended by six company secretaries, the dangers of harmony in the boardroom were highlighted. A harmonious boardroom could mean executives had ironed out their differences beforehand, giving non-executives a false impression of how the organisation is run.

“A fiery debate should be seen as a success,” said one participant.

The company secretaries were also keen to rip up the governance rule books. “Rip it all up,” said one. “We’ve been so busy sticking plasters on the patient that we can’t see the wound.

“I would also rip up our code of ethics – not because I don’t believe in ethics, but because our code is merely a restatement of the law, so it adds nothing. I would rip up our annual report too – it says nothing.”

The usefulness of board meetings was also questioned, with one saying non-executives added most value outside the boardroom, in rich conversations held the night before or around the water-cooler.

Investors also came under fire. “They should go ‘on record’ to set out what they think and want,” said one. Another added: “Investors are as lazy as hell. Pirc [the corporate governance consultancy] shouldn’t be allowed to do their job for them.”

The company secretaries called themselves “the WD40 of the boardroom”. “We don’t need a voice in the boardroom to have impact. Our power lies in listening to the debate and influencing it.”

Debates 19 and 20

Executive pay is given too much weight on investors’ lists of concerns, while risk and technology are given too little, according to participants in the latest think-tank debate.

Shareholders and boards need to consider risk in a more meaningful way, it was agreed, and risk reports need to be insightful and easier to understand – many are too big and too full of technical jargon.

Technology was considered a big risk, as well as an opportunity, and concerns were expressed that few boards allocate much time to it.

Similarly, boards were advised to spend more time helping to prepare the annual report. It is supposed to include an explanation of the business model and non-executives would learn much by increasing their involvement in its drafting.

Participants also considered board evaluations and proposed a rule that consecutive board reviews must not be conducted by the same external evaluator.

One said evaluators could not be objective if at the back of their mind they were hoping to win the assignment next time. They pointed to a further conflict of interest in asking an evaluator to critique the health of a board they were last responsible for evaluating.

In a subsequent debate, there were calls to slim down the Corporate Governance Code to its core principles, setting out best practice and avoiding bureaucracy and unnecessary complexity.

Fears were expressed that corporate governance can be “hijacked by politics” by being used to champion social policies – for example, the requirement that annual reports must now provide details of the company’s carbon footprint.

“Boards are there to champion growth – their corporate agenda shouldn’t be at the mercy of what’s fashionable in Westminster or Brussels,” said one.

An interesting suggestion aimed at improving the principal-agent relationship, by which the independent directors are deemed primarily to represent the shareholders, was made: turn the agents (directors) into principals (investors).

One participant said: “The only way really to align their interests is to require that the board – and senior management – invest their own money in a ‘material’ number of shares. ‘Material’ meaning in relation to their personal wealth.

“In the Victorian era, it was extremely common for companies to have substantial directorial share ownership requirements included in their articles of association.”

Views were expressed that this would also remove the need for long-term incentive plans and complex remuneration policies, which, it was argued, exist only to solve the agency problem in the first place.

Debate 18

The role of shareholders was the focus of attention as participants in a recent debate asked whether businesses really needed a more active and empowered shareholder base.

The consensus was that they do not and that shareholders can be motivated by short-term economic interest alone and have little – if any – experience of running a company or board. “Shareholders could destroy businesses,” said one.

If shareholders were to be given a more active role, they might focus on the board appointment process, it was suggested. They should focus on satisfying themselves of the suitability of the directors appointed to represent their interests. With the right directors in place, they should then let the board members do their job – not try to do it for them.

Fears that boards are too large and agendas too bloated were also expressed. With too many people around the table, and with so many items to get through, board members can be inhibited from pursuing a line of questioning and conversations can instead “ping-pong around the room”.

The participants suggested a solution: give more power to a satellite system of focused committees. These could have smaller memberships so that everyone can participate fully and feel accountable.

“Our board worked best during the crisis period. We had a small number of people who were meeting regularly and were focused on just a couple of things at one time,” said one of those at the debate.

A focused remit for each committee would keep the agenda slimmer, enabling proper exploration of each item and decisions to be taken more quickly.

Concerns were expressed that unless the chairman and non-executives were privy to the full discussion in each committee, they would not be able to discharge their fiduciary responsibilities. In reply, one participant suggested relieving them of responsibilities dealt with by committees to which they were not appointed.

Another said boards are already responsible for a great many things beyond those in which they participate and they discharge this responsibility by making sure the right people are appointed to do the job.

Participants went on to discuss using external facilitators to lead board meetings. One pointed out that the chairman is responsible for facilitating the board conversation as well as participating in the debate and decision-making.

It was agreed that effective facilitation requires a degree of detachment: a good facilitator will get the best out of everyone around the table, unencumbered by also trying to answer questions themselves. Trying to juggle the two, as chairmen do, is a big task.

Debates 15, 16 and 17

The qualifications of non-executive directors were questioned at the latest round table debate, with one participant calling it “ridiculous” that there are so few barriers to becoming a board director.

“Apart from a stellar CV, directors of our largest companies ought to show certain basic skills and understanding,” he said, pointing out that in other parts of the world compulsory training and examinations are being suggested for independent directors.

Another member of the panel proposed that representatives of key shareholders and other stakeholders should appoint non-executives, rather than allowing the current board to select their successors, as at present.

This would increase the likelihood of a more diverse board and make independent directors feel more responsible for upholding the interests of the shareholders who appoint them.

In response, it was argued that not all shareholders always have the best long-term interests of the business at heart and that it might be difficult to distinguish between investors who see themselves as “owners” and those who are “gamblers”.

Participants also proposed scrapping the unitary board structure, annual general meetings and the annual report. One said a board should consist solely of non-executives, because a board exists to be a check on management and it is unrealistic to expect executive directors to do both.

The AGM was dismissed as of little value and annual reports were called “dangerously misleading”. One said: “They purport to lift the lid on the workings of the organisation, but all they do is add obscurity. Ours is the size of two telephone directories and I doubt if anyone reads it.”

In a subsequent meeting, with different participants, it was agreed that a single source of governance legislation, regulation and best practice was needed to replace the current multiple sources.

On the other hand, it was argued that there might be no such thing as a single form of good governance and that companies should shape a system that suits their needs. One said: “Each company should run and govern itself as it sees fit. Governance should work on a model of ‘explain’, not ‘comply or explain’.”

It was argued that in the absence of a code, investors would have to scrutinise each company’s system of governance more closely.

During a separate debate, external board evaluations were said to be failing to fulfil their potential. One participant said: “Board evaluations can be farcical. We got a new boardroom table out of ours – it was square and it’s now round.”

Better disclosure of an evaluation’s findings was called for. “At the moment, the focus is on undertaking the evaluation and little is asked of what changed because of it.”

Debate 14

Appointing the right people to be non-executive directors was the central theme of the latest think-tank debate.

The participants stressed the need for a diverse board, with a call to stem the flow of women away from middle management positions in order to create a better pipeline of females in senior executive positions as a step towards improving gender diversity.

With the “right people” appointed, a board should find it easier to set much-needed higher ethical standards. The participants called for a shift in UK corporate culture from “value extraction” to “value creation”. One said: “For the past decade, value extraction has been the name of the game, especially in financial services.” It was agreed that it is up to the directors to demand this change.

Having assembled the best team, individual board members should not be asked to stand down just because they have served on the board for nine years, the meeting concluded. It was pointed out that many non-executives stand down in their ninth year to comply with the UK Corporate Governance Code.

But participants argued that the idea of a board director no longer being independent after nine years is a misreading of the code, which merely requires a board to say why it believes a director to be independent when there are reasons to question it – one of which might be having served on the board for more than nine years.

As well as the right people, the right information can determine the effectiveness of a board. One participant used military analogies to make their points, saying it is well understood in the army that the quality of the information can be the difference between life and death.

The amount of information was discussed, too. One panel member said: “Tank commanders have to monitor two conversations from the same headset: tactical information in one ear, with the bigger picture in the other. You have to learn to digest the two, simultaneously. Neither is superior in importance to the other.”

They agreed that if a company’s board papers are so large that they cannot be read in one afternoon – and if these papers cannot reasonably be made shorter without eliminating critical insight – then that business is too large or too complex to govern.

Another participant quoted US admiral Hyman Rickover: “He understood responsibility better than most, saying that unless you can point your finger at whoever is responsible when something goes wrong, then you never had anyone really responsible.

“Shared responsibility can diminish that and a unitary board, founded on collective responsibility, should give us pause for thought.”

Debate 13

Organisations benefit greatly from the rigour that preparing for a board meeting instils in management.

The participants in a recent debate, focused on the public sector, agreed that it was difficult to evaluate the value added by board meetings in the private sector because non-executives have been part of the governance system for so long. But they said government departments that have recently set up boards and appointed non-executives have created a chance to judge the “before and after”.

The conclusion is that there is value in the discipline of preparing for board meetings. One said: “The appointment of non-executive directors has been a catalyst to developing higher quality management Information. This is of benefit not just to our non-executives but also to civil servants.

“Our analysis of management information is much more forensic.”

A complication in the public sector, however, is a lack of clarity over roles. In the private sector the job of the non-executive is clear, the participants agreed, but in the public sector it is far less so, raising questions as to whether it is right to call them non-executive directors. Using the term risks transporting from the private sector a host of expectations that are not aligned with their powers.

It was agreed that non-executives should learn about the organisation by meeting employees, suppliers and customers so that they can judge for themselves its state of health.

Boards were also warned of the dangers of complacency. “Success can breed complacency,” say the minutes of the meeting. “Boards should build into their programme a period of reflection to challenge their most deeply held assumptions and the things they take for granted.”

Participants pointed out that many governance failures have followed a period of outperformance.

Specialist sector knowledge was also said to be essential for organisations in the public sector. One contributor said: “We would be horrified if none of the non-executives on the board of a financial services firm had any experience of financial services – indeed, there is currently a lively debate as to whether anyone at all should be allowed on to the board of a financial services firm without deep sector experience.

“And yet it is quite common for none of the non-executives on the board of an NHS hospital trust to have any healthcare – let alone clinical – experience.”

If a board is functioning well, the meeting concluded, it does not need a rule book. It was agreed that rules can hinder more than they help. One said: “A rule book risks absolving a board of a sense of responsibility – and compliance can breed a false sense of security.”

Debate 12

The value of a “wild card” member of the board was discussed. One said: “Boards need at least one person who can be relied on to bring something different to the table. What they lack in sector knowledge or experience they will make up for in objectivity and originality.

“The wild card should be equal to their fellow board directors in every other respect. They should bear the same responsibilities and liabilities or they would risk being marginalised.”

Debate 11

The fine line between building a cohesive board of directors, while avoiding “groupthink”, became the topic for discussion at one of the series’ recent debates. The question was asked: should we strive for cohesion or conflict?

One participant said: “In my experience, effective boards are the ones where everyone around the table gets on. Personalities matter much more than CVs.”

But it was admitted that a board that gets on too well might not be doing its job properly. The need for disagreement in decision making was stressed and successful sports teams and rock groups were used as an example: one participant pointed out that they are often far from harmonious, but the creative tension between the lead players can be an effective, albeit volatile, combination.

The requirement that boards comply with the UK governance code or explain why they have not was another subject for debate. It was agreed that “comply or explain is an excellent notion – if only more boards made the most of it”.

Those attending the session were critical of companies that “take the easy option” and simply comply with the code. One said: “I would like to see more organisations thinking deeply about what their business needs from their board and deviating from the code where it makes sense to do so.

“The word ‘comply’ is a fairly miserable word. Of course we want boards to act lawfully, but we look to them for leadership and to shape the future. Passive acquiescence should not find a home in the boardroom.”

A rosy view of how businesses are changing also raised the possibility of a different role for boards in the future. The minutes of the meeting say: “For the past few decades the narrative in business has been riddled with capitalist greed and we needed independent directors to act as a check on management’s self-interest.

“Today, there is a growing appetite to work for an organisation with strong values and a strong moral compass. If the management teams of tomorrow aspire to ‘do the right thing’, why would we need the board to keep them in check?”

Debate 10

Some of the UK’s largest and most complex companies are a law unto themselves: their boards and senior executives face an uphill battle to control them and governments have to negotiate to extract tax from them.

This was the view of participants in the recent debate, who agreed that large companies hold too much power and said it was unrealistic to expect management teams and boards to navigate overly complex structures.

It was suggested that non-executive directors should have support that is independent of the executive, akin to continental supervisory boards that are assisted by a dedicated support team.

The UK’s unitary board system, that combines non-executives and executives, means requests for information are normally answered by the management team, and seeking external support or information is considered an affront to the executive.

The participants also questioned the structure of board meetings, which “seem to sap the life out of even the most spirited of executives”, according to one. “I’ve seen brilliant independent thinkers lose their spark in the boardroom, weighed down by stodgy agendas, a brick of a board pack and a conformist atmosphere that smothers the maverick within them.”

Another argued that the dual functions of the non-executive director were a source of conflict: “We need to rethink the role. To supervise one minute and steward the next is a schizophrenic brief. One minute you are supporting the executive, the next you are challenging them – it’s difficult and detrimental to relationships.”

Debate 9

The size of boards and the limits on what they can achieve were highlighted at the ninth debate in the series. The participants concluded that smaller boards are better boards.

A report of their discussion says: “We know from experience that the bigger the group, the less likely someone is to speak out against the consensus – so why are companies allowed to have more than 12 people around the boardroom table?”

They also agreed there are limits to what can be achieved in board meetings alone, concluding that a board meeting is rarely conducive to free thinking and shaping the future of an organisation, especially in large organisations where there might be 10 or even 20 items on the agenda.

“If the board is to make a meaningful contribution to the future strategy of an organisation, the directors must meet more often and in other forums – beyond the monthly board meeting,” says the report of the meeting.

Board dinners and board meetings without an agenda are valuable: “The most valuable conversations of the board are commonly held over dinner the night before the meeting,” they agreed.

A wider issue discussed by the group concerns the tendency for most boards to operate in the same way.

They said boards of wildly different companies conform to the same set of norms, no matter how appropriate they might be. Instead, a board should consider what the business needs from it at any particular time.

They suggested experts in the business’s sector are not essential and that a board should consist of intelligent people willing to learn and ask questions, along with an executive team willing to explain specialist matters clearly.

“An intelligent non-executive on the board of a financial services firm with a healthy curiosity and the self-confidence to seek out an explanation for anything they don’t understand, will be perfectly able to perform well,” says the report on the debate.

Instead, boards should seek expertise on the science and psychology of decision-making. “If you’re alert to the tell-tale signs of decision-making bias, you are less likely to be susceptible to them,” they agreed.

“Boards should study the science of decision-making: keeping on top of the latest thinking on this should be just as critical as keeping on top of company and industry matters.”

Other points raised included:

● Board packs are often too big to be read.

● Board members might take on different responsibilities – some might consider the organisation’s future, while others check it is compliant.

Debates 7 and 8

The people who most depend on the long term success of a business – employees, customers, shareholders, and members of the company pension scheme – should form a council to which executives are held accountable. This was one of several radical suggestions put forward by participants in the seventh debate in the Board Intelligence series.

Employees are “the ones who really know what’s going on in the business” and “will be well placed to keep senior executives in check”, said one.

It was agreed that, as pensioners depend on their former employer’s pension scheme, they have the greatest incentive to safeguard the organisation’s long-term health. While employees can switch employers, members of direct benefit pension schemes cannot: they “really are in it for the long-haul. But what voice do they have?” the group asked.

Another proposal by the group members was for “bottom-up, not top-down governance”. One said: “People are basically good and want to do the right thing – they need support, not supervision; enablement, not control.” Systems of governance should be focused on empowering front line staff – rather than trying to keep them in check, the group concluded.

A possible decline in the UK’s global role as an example of best practice in corporate governance was highlighted at the meeting. “There’s no point in re-writing the governance rule book from London – it’s already being rewritten from the east,” said one participant.

It was pointed out that best practice in corporate governance has been fashioned in the image of big business – but most private sector businesses are small or medium-sized.

The group doubted the value of a “one-size-fits-all approach to corporate governance”, agreeing that organisations should be empowered to craft their own systems of governance. “Each business needs to work out for itself what it is there to do, and should develop a system of governance to help it achieve that,” said the minutes.

There was also a call for fewer governance rules and more significant consequences for breaking them.

● During the series’ eighth debate, attended by three chief finance officers, one said: “Annual reports are a charade. Despite everything I know about the business, our accounts tell me nothing – and I’m the CFO. So what use can they possibly be to our investors or shareholders?”

Debate 6

The idea of appointing non-executive, independent directors to look after a business’s best interests was dismissed as “nice, but naive” by the five company secretaries attending the sixth think-tank debate.

“How can we reasonably expect independent outsiders who have no prior connection to a business to display the depths of passion, courage and commitment that are needed to succeed as a non-executive?” they asked. One said: “In my experience, when you have major shareholders on the board they put the other non-executives to shame. The shareholder non-executives really care.”

They said the expectations placed on non-executives were unrealistic and that the brief should be reshaped. Non-executives have great power and carry the burden of considerable responsibility – but there is a mismatch between this and the time and the tools they have to work with.

One danger of a heavy reliance on non-executive directors is that it can breed a false sense of security about how businesses are run, they said.

The participants in the discussion suggested much could be learnt from privately owned small and medium-sized businesses and other organisations not obliged to conform to corporate governance best practice. “When common sense is allowed free rein, it’s interesting how often management appoints ‘advisers’, as they see genuine merit in external challenge, but they don’t saddle these advisers with responsibilities and liabilities,” one said.

However, another company secretary questioned whether advisers would have sufficient powers to keep the executive side “in check”.

Considering how a board should function, they said important decisions should not be taken in the boardroom – only formalised there. The thinking, investigating, and real formulating of opinions needed to take place outside the boardroom.

“This implies much more time is required between board meetings to fulfil the role properly – and it will soon be clear that no one can fulfil more than two of these roles at best,” the minutes of the meeting said.

One added: “I’ve often heard it said that it’s good to have non-executives with a rich portfolio of other board positions, as they can cross-fertilise ideas and insights and bring a broader perspective to the table. This sounds very sensible. But I’ve never yet seen any of these benefits in practice. In truth, they are just overstretched and overcommitted.”

Debate 5

Participants in the fifth think-tank debate discussed the role of employees in corporate governance. They said that those with the biggest stake in the long-term success of a business should have the balance of power – and that, arguably, this is the employees.

“Much of our system of corporate governance is intent on protecting and empowering the investor. But investors in large listed stocks have access to a liquid market and can usually exit should they wish to. By contrast, most employees are at the mercy of a relatively illiquid employment market and so surely have more skin in the game,” they said.

But concerns were also raised that both employees and shareholders can have vested interests that might not always be in the long-term interest of the company, whereas independent non-executive directors should not be driven by self-interest.

A strong case was made in favour of non-executives being required to pass “director exams”. The meeting concluded: “Given the powers vested in non-executives, would it not make sense to require them to pass an exam to confirm their understanding of their role and that they have the skills necessary to fulfil it?”

It was also agreed that non-executive directors should prepare a manifesto to support their election and re-election to the board – there would be great value in them having to clarify to all parties and themselves precisely how they intend to add value to the organisation.

Other points discussed:

● Chief executives should be limited to a five-year term but should have guaranteed tenure during this period – although concerns were expressed that this might make them “even more short-termist”.

● Modern technology should enable companies to engage more effectively – beyond the annual general meeting and annual report – with smaller shareholders.

● The AGM could include focus group discussions and polls of shareholder opinion on a range of issues, from risk appetite to changes in strategy.

Debate 4

A board is only as strong as its chairman – so it should be easier to fire a bad one, say the participants in the fourth round table debate.

They worry that chairmen tend to drag their heels when they should be stepping aside, and are too often reluctant to give up the income and perks of the job. “Boards should be wary of appointing a chairman who needs the income,” they conclude.

Doubt is cast on the ability of externally facilitated board evaluations to bring such issues to a head. “They often fail to do so – because it is usually the chairman who commissions the evaluation, and the chairman who the evaluator reports back to,” say the minutes of the meeting.

The participants also issue a warning over strong boards, which they say can be more of a hindrance than a help. “A strong board is not necessarily supportive of success. Arguably, many of the most eye-watering commercial success stories would not have come to pass if the management teams had been at the mercy of a strong board,” they say.

This is because a strong board would have been unlikely to allow the risks the chief executive was taking. They cite Glencore, the commodities and mining company, Ashmore, the investment manager, and ICAP, the interdealer broker, as all having had strong entrepreneurs at their helm whose “wings might have been clipped by a strong chairman breathing down their neck” during the growth period.

The complexity of businesses is another concern and the panel calls for greater simplicity and transparency. “Boards need to understand and buy into the business model to do their job well. But, all too often, non-executives can’t answer the fundamental question about how the company creates value,” it says.

“We need more simplicity and transparency in the structure of corporations, business models and corporate reporting, so that executives and non-executives stand a reasonable chance of fulfilling their roles, and so that investors can also understand the businesses they are invested in.”

Other discussion points:

● The panel regrets that the number of executives on main boards is decreasing because it concentrates power in the hands of the chief executive and chief finance officer, weakens the wider leadership team, and diminishes the non-executives’ ability to challenge the wider executive team.

● Could boards be replaced by councils of workers?

Debate 3

Boards need more expertise in the science of decision-making, according to the four company secretaries attending the third Board Intelligence debate. They suggest boards should invest in the neuroscience and psychology of decision-making.

They also say non-executives should be almost full time. They should visit the operations, attend management meetings, and “get under the skin of the business”. This would have the advantage of imposing a natural limit on the number of directorships any one person could hold.

For a wider view of the company, boards should have “reverse mentors”. The company secretaries recommend a dialogue with Generation Y – youngsters who have grown up in the broadband era – to challenge and educate themselves. “Generation Y has a very different view of the role of the company, with a greater sense of duty owed to society and an appetite for the role of business to be ‘beyond profits’,” they say.

They agree that passion and courage are essential ingredients for being a non-executive. “Directors need vision, passion and courage – they need to care enough to speak out,” say the minutes of the think-tank discussion.

Annual reports – described as “large, out-of-date documents that no one reads” – are heavily criticised: “Why do we still publish them? They are the product of a bygone, pre-internet era. With access to 21st-century media, we should be making much greater use of company websites and social media to communicate with shareholders.”

The usefulness of board packs, the briefing documents sent to members before meetings, are also questioned: “Our board pack is ridiculously large. No one could possibly read it,” says one participant in the debate.

The company secretaries issue warnings about longstanding chief executives, saying they should be limited to two terms in one post. “The longer they lead an organisation, the more likely their ego is to take centre stage,” they say. “No matter what anyone may say, in reality the chief executive controls the board.”

Other points raised include:

● Senior independent directors should be given additional powers: they are expected to be “the most independent of the independents” and act as a check on the independent chairman, but their role is poorly defined.

● Every director should have an answer to the question: “What would it take to make me resign?”

Debate 2

A fear that UK boards are confused about their role and who they serve was a key concern of the four chairmen taking part in the debate. They said the contract between companies and society needs to be clarified.

If society is an important stakeholder, they asked how a board could navigate its many conflicting interest groups. One suggestion was to appoint one or two non-executive directors with a particular responsibility for representing society’s interests.

An alternative would be to revert to the simpler notion of serving the shareholder: it might be a narrow function, but at least it is a role that can be understood, they said.

The chairmen also called for clarity over the status of corporate governance rules. “Governance should be rooted in laws, not codes: ‘comply or explain’ is too ‘fluffy’ and not practical when you are dealing with an international investor base,” say the minutes from the meeting.

The non-binding “comply or explain” requirements of the Corporate Governance Code were deemed too vague and permissive of idiosyncratic behaviour by boards. This affects international investors who are unfamiliar with this model and are not able to deliver the style of stewardship that “comply or explain” requires. It also means investors with a large number of small equity holdings do not have the capacity to fulfil their stewardship duties.

The chairmen said non-negotiable rules would lessen the complexity of corporate governance from the investors’ perspective, and they asked whether it was time for a global solution – a single set of corporate governance rules.

Rules should also extend to the management of a company, they agreed. A governance code for management could provide guidance on how it should behave: “They are the ones running the company and making the day-to-day decisions and their behaviour will have the greatest impact on company performance and behaviour – far greater than the board,” they said.

Other points raised included:

● Boards are expected to be superhuman: expectations need to be more in line with what is achievable;

● Boards should be smaller;

● Passion on a board is more important than anything you can prescribe in a code.

Debate 1

Job security among non-executive directors is high: the chances of being ejected by shareholders at the annual general meeting are negligible, and the four chairmen taking part in the first Board Intelligence debate said re-election rates are “high, even by North Korean standards”.

They concluded that shareholders need to take their governance duties more seriously, with the most engaged receiving an enhanced dividend. “Few shareholders take their governance duties seriously, and paying them to do so might get them over the line,” say the meeting’s minutes.

The difficulty of protecting shareholder interests when a business is large or complex was another concern for the chairmen. “RBS, HBOS and Enron all had great people on their boards, but failed. Non-executives did not understand or know what was happening. The challenge is exacerbated in regulated businesses where supervision and compliance puts further strain on the board.”

To create a more manageable role, especially within highly regulated businesses, the meeting suggested: “The board should separate its roles into two: one for supervision and risk management; and one for strategy development and value-creation. The same people need not sit on both.

“Within a highly regulated company, fulfilling the board’s risk management and supervisory role is no mean feat. The people appointed to boards today are those best qualified to fulfil the supervisory role – lawyers, governance experts, financial specialists.

“This leaves barely any room for anyone with the experience of how to grow the business. So instead of trying to shoehorn strategy on to the agenda when neither the time available nor the skills around the table are conducive, strategy and growth should be separated into a separate forum – a ‘strategic advisory board’.”

Their other suggestions include:

● No one should chair more than one FTSE 100 board. “The chairman is critical in a crisis and if their diary is booked up, they will almost certainly fail to be there when you need them the most,” say the minutes.

● Higher pay for chairmen might encourage smaller portfolios of roles, but appointing people who come to rely on the money raises questions over independence.

● The assumption that non-executives should serve for no longer than nine years on one board ought to be reconsidered. The chairmen said the UK Corporate Governance Code “seems to value newness over experience. We should seek a balance on the board of recent appointees who are fresh and objective, and others who are more knowledgeable about the business. To regulate in favour of one over the other makes little sense.”

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