19 December 2018 by Bernadette Barber
15 years on the Higgs report still has lessons to teach us
The Higgs report may be 15 years’ old but its recommendations, with very few exceptions, still underpin our thinking on board composition and non-executive director effectiveness today.
There was a concern that Higgs’ recommendation that ‘at least half the members of the board, excluding the chairman, should be independent non-executive directors’ (NEDs) could give rise to unintended consequences in terms of board composition. In essence, there was unease that compliance would be achieved by reducing the number of executive directors on the board rather than by bolstering the presence of independent NEDs.
Higgs was explicit in urging a strong executive presence specifically to guard against the risk of ‘distortion or withholding of information, or lack of balance in the management contribution to the boardroom debate, when there is only one or a very small number of executive directors on the board.’ The filtering of board information flowing through a dominant chief executive is less likely to occur on a board where there is a strong executive team. NEDs don’t want to be painted a rosy picture, they need an accurate one.
Of all the UK corporate governance reviews since Cadbury, the Higgs report is, the most explicitly supportive of the role of the company secretary. The report dedicates an entire section, under the heading ‘Information and the company secretary’, to analysing in detail the vital role that an effective company secretary will play in ensuring best use is made of NEDs’ time. It concluded that the effectiveness of the company secretary was reliant not only on the calibre of the individual but also on their independence.
This is echoed in another of the world’s most seminal corporate governance works, the King IV Code on Corporate Governance, which sets out detailed guidance on the need for ‘professional and independent’ advice on corporate governance matters. It is a view also supported by investors. In the 2018 Institutional Shareholder Services (ISS) UK and Ireland Proxy Voting Guidelines, the shareholder expectation is clear that directors will generally not be appointed as company secretary.
It goes without saying that NEDs, who do not have the same access to day-to-day management information that their executive peers enjoy, need to be provided with clear, accurate and relevant information.
“Higgs was explicit in urging a strong executive presence”
An experienced company secretary who has supported many Board meetings, is likely to be highly skilled at ensuring that the papers achieve this aim without resorting to the unhelpful kitchen-sink reporting that can be tempting or glossing over risks and shortfalls.
But it not just through this experience that the company secretary brings value to board information flows.
Company secretaries are often lauded as the ‘corporate conscience.’ Given that it is unlikely that chartered secretaries and chartered governance professionals are naturally more saintly individuals than those who choose to qualify as accountants or solicitors, there must be something in the role that creates this trust in our integrity.
Perhaps traditionally we have been fortunate to be somewhat isolated from the commercial pressures that can come with other roles. And a key part of our responsibilities revolve, one way or another, around guarding the Board’s reputation – perhaps this causes us to consider matters from a different perspective.
The independence and integrity of the company secretary and the responsibility inherent in his or her role to support the NEDs, means they occupy the sometimes-tricky middle ground between executives and non-executives. This can present challenges. Particularly at times of stress, and may become practically impossible to successfully navigate when the company secretary’s role is occupied by someone with conflicting executive responsibilities.
Most dangerously, it is when difficulties exist within a business and the non-executives need the most honesty, when those conflicts are most likely to lead to a concealment or distortion in board reporting. In the absence of a separate company secretary the safeguard offered by a degree of segregation of duties is lacking.
On a larger board where there are several strong executive directors, one of whom is also company secretary, the risk that one or more executive directors may cynically influence board information flows is, perhaps, still well mitigated. However, by and large, the Higgs message that it ‘is crucial to safeguard the integrity of the position [of the company secretary], so that their impartiality is not compromised’ has perhaps never seemed more vital than now when the need for strong and ethical cultures within our boardrooms is widely recognised and endorsed.