19 June 2019 by Peter Swabey
A roundup of consultations and responses recently undertaken by ICSA: The Governance Institute
This has been a busy month – there have been a number of consultations to which we have responded and there are still more to go. Not least that on corporate transparency and register reform which I mentioned last month. It closes on 5th August and I look forward to hearing member views. This ties in very closely with a consultation that we have just completed on the UK implementation of the 5th Money Laundering Directive. We have also responded to the Brydon review and to the Department for Business, Energy and Industrial Strategy (BEIS) on their proposals for the implementation of Sir John Kingman’s review of the Financial Reporting Council.
Probably our most important piece of work, though, has been our own consultation on the review of the effectiveness of independent board evaluation in the UK listed sector which we are undertaking under the auspices of BEIS. In its feedback statement and response to the consultation on insolvency and corporate governance, the Government said that it would bring forward proposals to improve boardroom effectiveness and strengthen directors’ training and guidance and the minister for small business, consumers and corporate responsibility, Kelly Tolhurst MP, wrote to ICSA to ask for our assistance in improving the quality of board evaluations by identifying ways of improving their effectiveness and developing a code of practice for board evaluators.
This is an important piece of work – especially given the additional focus on the reporting of board evaluation in the revised UK Corporate Governance Code, where the annual report is now required to describe “how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition.” In recent years, a flourishing market has developed in this area, with more than thirty different board reviewers used by FTSE 350 companies in 2017/18. There is a perception from some in the market that the quality of these reviewers is variable.
The consultation paper starts by asking “what is the purpose of an independent board evaluation?” There are two schools of thought – one that it is primarily a self-development tool for the board; the other that it is an independent audit of the effectiveness of the board. These two purposes do not necessarily conflict, but if both are to be fully realised, it is necessary for the evaluation and its reporting to be carefully drawn. It would be dangerous to assume that the process of evaluation can ever guarantee the complete effectiveness of a board or, perhaps more importantly, that the board will not make a mistake going forward. Part of the function of a board is to make decisions; it is the nature of human beings that our decision-making is sometimes flawed and so there can be no guarantee that a board will not misjudge a decision in the future. Even the most robust evaluation is at least a snapshot of how the board performs at a particular point in time.
The original request from BEIS focussed on a code of practice for board evaluators, but we believe that this is only a partial answer and have focussed more on the request to identify ways of improving effectiveness. It is difficult to see how this can be achieved by targeting board evaluators alone.Evaluators can be responsible for their own behaviour, and we would envisage a code of practice which might include the reviewers’ competence and capacity and set standards of independence and integrity to which signatories would be expected to commit.
But companies are as much, if not more, responsible for ensuring that the evaluation is robust and they certainly have the primary responsibility for making sure that necessary action is taken as a result. In addition to a draft voluntary code of practice, we are therefore seeking views on two further elements of a potential package: voluntary principles for listed companies to follow when engaging external reviewers to undertake board evaluations; and guidance for companies on disclosure in the light of the changes in the 2018 Code.
Nothing has been decided, and we are keen to hear from board reviewers, companies and investors. We would particularly appeal to ICSA members to share their experiences. Company secretaries have a birds-eye view of their boards in action and are often closely involved in the evaluation process. Your insights on the purpose of board evaluation and whether it is being met will be invaluable. The consultation runs until 5 July, and we will be giving some early feedback on what we have heard at the ICSA annual conference on 9-10 July at ExCeL London.