Corporate Governance: trying to fit a gallon into a pint pot

I’m at that age when friends and colleagues start packing in the corporate life to go and do something else. Many of them tell me they are going to have portfolio careers. With a bit of money behind them but not quite ready to draw their pensions, some consultancy work and the odd non-exec role should fill the gap nicely.

The trouble is, while the pay and time commitment might look like something that is easy to fit around the rest of your life, the expectations of non-executive directors are rising. If something goes badly wrong, you might end up before a House of Commons committee, accused of being asleep at the wheel. Even if the company’s problems are less dramatic, journalists will still ask the question, “Where were the non-execs?” At one time, it may have been enough to turn up every month and be the CEO’s critical friend but the implications of today’s corporate governance regime demands a much higher level of engagement from non-executives.

Stewardship is the order of the day now. Corporate governance is not only expected to mitigate the risk of sudden and damaging company failures, it is also charged with ensuring the long-term viability of companies. The debate has widened to include political, social and economic questions such as fairness, trust in business, short-termism, lack of investment and even the UK’s chronic productivity problem. With the Stewardship Code, shareholders, too, are expected to embrace the idea that, together with the directors, they have a joint responsibility for the long-term sound management of companies.

Here, though, we run into questions of capacity. Having worked with and researched hundreds of boards around the world, Henley’s Professor Andrew Kakabadse concludes that many directors are unable or unwilling to hold each other to account:

“A lack of tough introspection is leading to corporate collapse and scandals. As a result boards are becoming paralysed and unwilling to speak out, even though they know something isn’t right within the organisation.

“It is not bad strategy or governance that is responsible for some of today’s organisational failures. It is a failure of stewardship. Board members and executives allow bad situations to spiral out of control because of the discomfort they face in raising an uncomfortable issue.”

One of the reasons for this, he says, is that they don’t spend enough time working together:

“Board members in 66% of the world’s top teams simply don’t talk to each other enough. They are too concerned about their own specialist areas, or are too inhibited to raise challenging issues.”

To build the sort of relationships you need to direct a company strategically and to trust your colleagues enough to have challenging conversations, you need time to get to know them. Otherwise, as the Treasury Select Committee put it, even a group of highly intelligent and experienced people is little more than a superficial club:

“Too often, eminent and highly-regarded individuals failed to act as an effective check on, and challenge to, executive managers, instead operating as members of a ‘cosy club’.”

The BEIS report on corporate governance made a similar point:

“A board must be able to be cohesive and supportive as well as genuinely challenging. This is no easy balance to strike; and achieving it is a crucial role for the chair. We saw in our BHS inquiry what can happen if it is not right: the consequences when NEDs do not provide the degree of constructive challenge required, or indeed participate at all in key decisions.”

This is all very well but how can people be expected to do all this on one day a month? An effective board, capable of operating the corporate governance code, of engaging with investors, of working with executives to develop the strategy and vision and of holding those executives to account requires a lot more input than most non-executive directors are currently contracted for.

Developing a shared vision and strategy while building a cohesive team and developing a culture which encourages constructive challenge is not easy. Furthermore, to mount a constructive challenge in a board setting requires a considerable degree of confidence. This, in turn requires a combination of solid factual understanding and mental toughness.

Is it really reasonable to expect such things of a group of people that only meets on an occasional basis? Should we be surprised when non-executive directors, contracted to work only a few days a month, don’t foresee the consequences of executive decisions? Can we really expect them to be corporate trouble-shooters and change catalysts on the pay and time commitment of visiting lecturers?

A quarter of a century after the UK’s first corporate governance reforms, there are still sudden and devastating corporate collapses, investors still complain about executive behaviour, chief executives are handsomely rewarded for mediocre performance and if the levels of investment are anything to go by, the UK’s business culture is as short-termist as it ever was. Is more corporate governance code the answer to this? Or will it simply layer more tasks into a system that already lacks the capacity to do what is expected of it?

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1 Comment

Kevin Ball - VP HR

According to the most recent Spencer Stuart survey, the average NED remuneration for FTSE 250 is around £90,000 per annum. Yes, we can expect a lot more from them than we are currently receiving.