Archive for the ‘Directors’ Tag

On board culture and diversity

Corporate governance thinking and practice seems to evolve either as regulators respond to corporate failings or directors adopt the prevailing conventional wisdom.  A year or two ago, the call was for boards to recognize their responsibility for identifying their company’s risk profile, assessing long-term risk, and ensuring appropriate risk  strategies and policies were in place and working appropriately.   Cadbury and the other early corporate governance codes had nothing to say about risk: now it has become a central issue.

Today, the conventional wisdom is focusing on board culture and board diversity.  But commentators seem unable to agree on what is actually meant by culture or diversity.  The time has come for some clearer thinking.

In March this year, I wrote in this blog that culture ‘can be thought of as the beliefs, expectations, and values that people share.  Like the skins of an onion, culture has many layers – national cultures, regional cultures, the culture of a company, and the culture in a board room.’  Much of the recent commentary about culture in corporate governance has focused on board level culture and its reflection on the culture of the company. so that it permeates activity at every level and in every sphere.

In its February 2017 report on corporate governance reform[1], the UK Department for Business, Energy and Industrial Strategy identified culture as ‘the central tenet of good corporate governance (which) should be embedded in the culture of all companies, so that it permeates activity at every level and in every sphere.’  Now what does that actually mean?  What do directors need to do to make it operational?

Board level culture depends on the experience, beliefs and expectations of those involved and, in particular on the leadership of the bard chairman and any other dominant personalities on the board.

Composition of boards

Companies should recruit executive and non-executive directors from the widest possible base.

The Report supports the recommendations of recent reviews on gender and ethnic diversity but recommends further measures ‘to ensure that diversity is promoted at all stages of careers to broaden the pool of talent at the executive level. To this end, the Government should set a target that from May 2020 at least half of all new appointments to senior and executive management level positions in the FTSE350 and all listed companies should be women.’ Overall, the Report’s recommendations are aimed at permanently ingraining ‘the values and behaviours of excellent corporate governance into the culture of British business.’

 

[1] For more information see the most recent blog from Professor Chris Mallin on this website.

Advertisements

Ethnic Diversity on UK Boards

There has been much emphasis on the importance and value of board diversity. However the focus has generally tended to be on gender diversity, for example, in the UK the Davies Report (2011) recommended that representation of women on FTSE 100 boards be increased to at least 25% by 2015. By 2015 this 25% target had been exceeded with FTSE 100 boards having 26.1% of women on the board.

Various corporate governance codes and guidelines have stated that firms should have a ‘balanced board’. In 2014, when updating the UK Corporate Governance Code, the Financial Reporting Council pointed out that constructive and challenging debate on the board can be encouraged ‘through having sufficient diversity on the board. This includes, but is not limited to, gender and race. Diverse board composition in these respects is not on its own a guarantee. Diversity is as much about differences of approach and experience, and it is very important in ensuring effective engagement with key stakeholders and in order to deliver the business strategy’.

‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’

Earlier this month The Parker Review Committee, chaired by Sir John Parker, issued ‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’.

Starting from the premise that UK boardrooms, including those of leading public companies, do not reflect the UK’s ethnic diversity nor the stakeholders that companies engage with (customers, employees, etc.), the Parker Report states that ‘ethnic minority representation in the Boardrooms across the FTSE 100 is disproportionately low, especially when looking at the number of UK citizen directors of colour’. For example, the Report highlights that of 1087 director positions in the FTSE 100, UK citizen directors of colour represent only about 1.5% of the total director population with 90 individual directors of colour (four hold two Board positions) whilst total directors of colour represent about 8% of the total (compared to 14% of the UK population). Some 53 FTSE 100 companies do not have any directors of colour. Seven companies account for over 40% of the directors of colour, interestingly five out of the seven companies have headquarters historically located outside the UK. In terms of the key board roles of Chair and CEO, only nine people of colour hold the position of Chair or CEO.

The Parker Report’s recommendations can be found at http://www.ey.com/Publication/vwLUAssets/A_Report_into_the_Ethnic_Diversity_of_UK_Boards/$FILE/Beyond%20One%20by%2021%20PDF%20Report.pdf and are as follows:

 

 

  1. Increase the Ethnic Diversity of UK Boards

1.1. Each FTSE 100 Board should have at least one director of colour by 2021; and each FTSE 250 Board should have at least one director of colour by 2024.

1.2. Nomination committees of all FTSE 100 and FTSE 250 companies should require their internal human resources teams or search firms (as applicable) to identify and present qualified people of colour to be considered for Board appointment when vacancies occur.

1.3. Given the impact of the ‘Standard Voluntary Code of Conduct’ for executive search firms in the context of gender-based recruitment, we recommend that the relevant principles of that code be extended on a similar basis to apply to the recruitment of minority ethnic candidates as Board directors of FTSE 100 and FTSE 250 companies.

  1. Develop Candidates for the Pipeline & Plan for Succession

2.1. Members of the FTSE 100 and FTSE 250 should develop mechanisms to identify, develop and promote people of colour within their organisations in order to ensure over time that there is a pipeline of Board capable candidates and their managerial and executive ranks appropriately reflect the importance of diversity to their organisation.

2.2. Led by Board Chairs, existing Board directors of the FTSE 100 and FTSE 250 should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally, or non-executive Board positions externally.

2.3. Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on Board roles internally (e.g., subsidiaries) where appropriate, as well as Board and trustee roles with external organisations (e.g., educational trusts, charities and other not-for-profit roles). These opportunities will give experience and develop oversight, leadership and stewardship skills.

  1. Enhance Transparency & Disclosure

3.1. A description of the Board’s policy on diversity be set out in a company’s annual report, and this should include a description of the company’s efforts to increase, amongst other things, ethnic diversity within its organisation, including at Board level.

3.2. Companies that do not meet Board composition recommendations by the relevant date should disclose in their annual report why they have not been able to achieve compliance.

 

Chris Mallin

November 2016

Worker directors – we’ve been here before

At the UK’s Conservative Party conference, in early October 2016, the Prime Minister, Mrs. Theresa May, raised some significant corporate governance issues:

‘So if you’re a boss who earns a fortune but doesn’t look after your staff, an international company that treats the tax laws as an optional extra…a director who takes out massive dividends while knowing that the company pension scheme is about to go bust, I’m putting you on warning…’

Each of these issues has been discussed in recent blogs. But she also suggested that workers should be appointed to boards of directors. As could be predicted, this suggestion was welcomed by the Trades Union Council but raised alarm in some British boardrooms.

But we have been here before. Extracts from Corporate Governance: Principles, Policies, and Practices (3rd ed., 2015, pages 12 and 85) explain why:

 ‘In the 1970s, the European Economic Community (EEC), now the European Union, issued a series of draft directives on the harmonization of company law throughout the member states. The Draft Fifth Directive (1972) proposed that all large companies in the EEC should adopt the two-tier board form of governance, with both executive and supervisory boards. In other words, the two-tier board form of governance practised in Germany and Holland, would replace the British model of the unitary board, in which both executive and outside directors oversee management and are responsible for seeing that the business is being well run and run in the right direction.

In the two-tier form of governance, companies have two distinct boards, with no common membership. The upper, supervisory board monitors and oversees the work of the executive or management board, which runs the business. The supervisory board has the power to hire and fire the members of the executive board.

Moreover, in addition to the separation of powers, the draft directive included employee representatives on the supervisory board. In the German supervisory board, one half of the members represent the shareholders. The other half are chosen under the co-determination laws through the employees’ trades’ union processes. This reflects the German belief in co-determination, in which companies are seen as social partnerships between capital and labour.

The UK’s response was a Committee chaired by Sir Alan Bullock (later Lord Bullock), the renowned historian and Master of Saint Catherine’s College, Oxford. His report – Industrial Democracy (1977) – and its research papers (1976) were the first serious corporate governance study in Britain, although the phrase ‘corporate governance’ was not then in use. The Committee proposed that the British unitary board be maintained, but that some employee directors be added to the board to represent worker interests.

The Bullock proposals were not well received in Britain’s boardrooms. The unitary board was seen, at least by directors, as a viable system of corporate governance. Workers had no place in the boardroom, they felt. A gradual move towards industrial democracy through participation below board level was preferable.

Neither the EEC’s proposal for supervisory boards nor worker directors became law in the UK. Since then, the company law harmonization process in the EU has been overtaken by social legislation, including the requirement that all major firms should have a works council through which employees can participate in significant strategic developments and changes in corporate policy.’

Proponents of industrial democracy still argue that governing a major company requires an informal partnership between labour and capital, so employees should participate in corporate governance. Maybe an extension of the Shareholder Senate idea, suggested in a recent blog, called a Stakeholder Senate could provide another forum to inform, liaise with, and influence the board.

Bob Tricker October 2016

 

 

Divide and Conquer? Splitting the Roles of Chair and CEO

 It is widely recognised that corporate scandals and collapses often occur when there is a single powerful individual in control of a company.  This is exacerbated when there is a lack of independent non-executive directors on the board.  Therefore it seems axiomatic that powerful individuals can be constrained, and the temptations they may face conquered, by having in place a sound corporate governance structure achieved through dividing the roles of Chair and CEO.

UK Context

Back in 1992, the much lauded Report of the Committee on the Financial Aspects of Corporate  Governance, often referred to as the Cadbury Report after the Chair of the Committee, Sir Adrian Cadbury, identified the potential danger of combining the roles of Chair and CEO in one person.  The Cadbury report recommended ‘there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision’.  This principle was embodied in corporate governance best practice in the UK, with the Combined Code on Corporate Governance (2008) stating ‘there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision’, and furthermore the Combined Code explicitly states ‘the roles of chairman and chief executive should not be exercised by the same individual.’

Whilst combining the roles of Chair and CEO is rare in the UK’s largest companies, Marks and Spencer PLC is a notable exception.  In May 2004 Sir Stuart Rose was appointed to the position of Chief Executive and subsequently in 2008 he became both chairman and CEO until July 2011.  This combination of roles goes against the Combined Code’s recommendations of best practice.  As a result in 2008 some 22 per cent of the shareholders did not support the appointment of Sir Stuart Rose as chairman.  Nonetheless he remains in the combined role although there is still considerable shareholder unrest and 2009 has seen more dissent by shareholders on this issue.

US Context

In the US, the roles of Chair and CEO have often been combined but now more and more companies are appointing separate individuals to the two roles.  A recent example of a US company which has decided to appoint an independent chairman is Sara Lee, the famous producer of gateaux, beverages and body care products.  Sara Lee has decided to make this change as a response to investor pressure and also the growing trend in the US to split the two roles.  Kate Burgess (FT Page 27, 9th October 09) in her article ‘Sara Lee to separate executive roles’ explores this case in more detail.

Institutional Investor Pressure

In the UK there has long been pressure brought to bear by institutional investors on companies which have tried to combine these roles.  This pressure, together with the long history in UK corporate governance codes against the combination of roles, means that few large companies seek to combine the roles (although as noted above, Marks and Spencer plc is an exception).

Recently Norges Bank Investment Management (NBIM), a separate part of the Norwegian central bank (Norges Bank) and responsible for investing the international assets of the Norwegian Government Pension Fund, has started a campaign to convince US companies to split the roles of Chair and CEO and appoint independent chairmen.   Kate Burgess (FTfm Page 10, 12th October 09) in her article ‘Norwegian fund steps up campaign’ highlights how NBIM has submitted resolutions to four US companies calling on them to appoint independent chairmen.  The four companies are Harris Corporation, Parker Hannifin, Cardinal Health Inc, and Clorox.  In addition NBIM has also voted against combined Chair/CEOs at some 700 US companies.  Interestingly Sara Lee had also been the focus of action by NBIM before agreeing to appoint separate individuals to the roles in future. Also in Kate Burgess’ article, Nell Minow of The Corporate Library http://www.thecorporatelibrary.com/ states ‘NBIM can leverage a lot of shareholder frustration and a widespread sense that this is a sensible, meaningful but not disruptive initiative’.

Concluding comments

It seems to be only a matter of time before the vast majority of companies will split the roles of Chair and CEO.   Of course the individuals appointed to those roles must be both capable of fulfilling the tasks expected of them, and of ensuring that ultimately the two roles, carried out by separate individuals, unite the company under a common leadership approach.  That may prove more difficult than many imagine and so the appointments process must consider fully the many traits needed to ensure success.

 Chris Mallin 16th October 2009

A Grilling for Directors

– in which Bob Tricker continues his call for a radical rethink of the way power is exercised over companies by society.

In a previous blog, I argued that the relationship between auditors and directors, in which directors de facto appoint the auditors who then report to them, was too close. I proposed that auditors should be appointed by and report to regulators and, through them, to other interested stakeholders. In this blog I explore the way directors communicate with their shareholders and again develop a radical alternative to accepted practice.

The global financial melt-down and on-going economic explosion continues to expose weaknesses in corporate governance practices and, more importantly, attitudes. Giving wider powers to regulators and introducing more regulations, as is now being proposed, will have little effect if those regulators continue to be closely associated with, and often come from, the industry they are regulating. Long standing assumptions about the way things should be done need to be questioned not reinforced. Expectations and attitudes have to change.

Taking directors remuneration as a dramatic example, in recent years we have seen a massive increase in the ratio of CEO pay to that of their hourly paid workers, in many cases as their firms eroded shareholder value. The old legal concept of fairness, what a reasonable man would expect, has long been forgotten. As Barack Obama has written “what accounts for the change in CEO pay is not any market imperative. It’s cultural. At a time when workers are experiencing little or no income growth, many of America’s CEOs have lost any sense of shame about grabbing whatever their pliant, hand-picked corporate boards will allow.” [The Audacity of Hope, Crown Publishing Group (Random House), New York, 2007]

The director/shareholder relationship

At the heart of corporate governance are the relationships between shareholder-investors and top-management decision-makers. Shareholders’ ability to question directors and directors’ accountability to shareholders are crucial. In the 19th century that was relatively easy for the joint-stock limited-liability company. Companies were then smaller, less complex and licensed by the state to pursue a single aim, build a railway, run an iron foundry, supply a town with gas, for example. Moreover, the shareholders were individuals and could be counted in tens or hundreds. Institutional investors, mutual funds, and pension funds had yet to be invented.

How different today. Complex corporate groups, with hundreds of subsidiaries, associate companies and joint ventures in pyramids, networks and geared chains, with multiple shareholders – institutional investors including hedge funds, mutual funds, pension funds, insurance companies, even sovereign funds – not just individuals. The challenge is how to communicate with them, to listen to them, and be accountable to them.

The classical solution, of course, was to require meetings of shareholders so that the board could explain their stewardship of the corporate funds. That requirement still holds for the public company. But we all know the ongoing farce of meetings tightly organised by the company secretary, dominated by the chairman, with questions so restricted that communication is essentially one way, seldom providing an adequate opportunity for genuine dialogue.

Companies were also required by law to provide their members with regular written reports with information laid out in company law and stock exchange listing rules. Today, electronic mail and corporate internet sites supplement the printed word. But such reporting is still one-way: company to shareholders. The opportunity for investors to seek information about their directors’ activities is limited.

How can shareholders really find out what they want to know? How can they genuinely exercise power over the directors they have appointed to be stewards of their funds? Successive reports, including the British Myners Report, have called for institutional investors to play a bigger part in corporate governance. A few institutional investors, like CalPers in the United States and Hermes in the UK, together with some investor organisations, such as the Association of British Insurers have certainly made their presence felt. But others still prefer the option of ‘doing the Wall Street walk’ or voting with their feet as they say in Britain, avoiding the potential costs of getting locked-in should they get involved in governance issues.

A new approach

But there is another way. Anyone watching the recent grilling of directors of financial institutions by Congressional Committees in the USA and Commons Treasury Select Committees in the UK saw an alternative approach. Why should investors not be able to wield similar power? After all they actually own the companies.

Who would do the grilling? It would have to be representatives of the shareholders, who have not been captured by the company and its directors. Skilled representatives from institutional investors or perhaps a new breed of professionals come to mind.

In Australia, Shann Turnbull has proposed a corporate senate that might be adapted. He believes that “most corporations in the English speaking world are essentially corrupt because their unitary board structures concentrate on conflicts of interest and corporate power.” His alternative is a dual board structure with a corporate senate elected on the basis of one vote per shareholder, not per share. In his model the senate has no pro-active power, just the right to veto where it feels the board has a conflict of interest. Its members could certainly be trained to grill directors on behalf of the other shareholders.

Would directors readily agree to be grilled? Of course not! Self-regulation, exhortation, or listing rules requirements would not suffice. Legislation will be needed. Shareholders, who actually are the company, would need to be given power to carry out the level of grilling and transparency given to US Congressional and UK Treasury Select Committees. Proceedings would need to be public, probably carried live through the internet and available as a record on a web site.

Directors have a fiduciary duty to act in the interests of shareholders, not their own. Somehow this has been forgotten. Professional grilling by shareholders of their directors would move the original concept of directors’ stewardship, fiduciary duty, and accountability towards the reality of 21st century expectations and demands.

Bob Tricker