07 June 2017 by Gerry Brown
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.
“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”
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.
“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”
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.
The seven much needed, but practical, areas of early action to enhance the outcomes of the Green Paper are:
More from ICSA...
ICSA commented on the need for better education and advice about the challenges of becoming a listed company back in their response to the consultation on the AIM rules for companies and AIM rules for nominated advisers (under AIM notice 38) in 2014.
Specifically, in relation to 'Rule 4 – Qualified Executives' the response said: 'We note that a lot of work has been done to refine the criteria for becoming a Nomad and, in particular, for becoming a Qualified Executive within a Nomad. However, much of the approval criteria relates to the individual having acted in a (lead) corporate finance role with involvement in Relevant Transactions.
'We are concerned that, although such experience is exactly what is appropriate for a Nomad’s involvement in bringing a company to market, it is not necessarily the appropriate experience for giving good advice on the application of the AIM rules on an ongoing basis or, particularly, on advising a company on governance issues.
'We believe that the LSE should provide in these Rules for a separate category of Qualified Executive, who is not able to advise companies being introduced to AIM, but is able to act as an adviser for existing AIM companies. We would respectfully submit that qualification as a member of ICSA should, with appropriate experience, be regarded as sufficient qualification in that regard.'
You can read the full response from ICSA on the website.