Governance to reflect the times - 'They are a changing'

Anniversaries are useful markers, and even the happiest ones offer potential for both celebration and review. The wisdom of Sir Adrian Cadbury, who provided the basis for the UK’s Corporate Governance Code, has served us exceedingly well. The Code has been six times reviewed and updated since 1992. But 25 years is a long time in a fast-changing world, and as the United Kingdom takes its first steps to leave the European Union, it is clear that businesses have a plethora of concerns. For both commercial success and best corporate governance, they are going to need diverse and professional boardrooms.

Prime Minister Theresa May placed corporate governance at the top of her agenda nine months ago, even before she took office. A subsequent green paper focused on three areas for parliamentary debate: executive pay, strengthening the employee and the voice of stakeholders more widely and the extension of current corporate governance regulations to large private businesses. The Financial Reporting Council (FRC) is now consulting on a review of the Code.

The FRC is also soon to mark an anniversary – of one year as the Competent Authority which administers a number of enforcement procedures including those for audit in the UK. This week it announced that it will commission an independent review of the sanctions imposed under its enforcement procedures, with a view to examining their efficacy.

It said the review would consider matters such as whether the reasons for imposing sanctions set out in its guidance and policies remain appropriate, the fairness and the effectiveness of the range of sanctions available under the enforcement procedures, and whether the financial penalty sanctions, in particular, are adequate to safeguard the public interest and deter wrongdoing.

As corporate governance watchdog, the FRC had already made it clear that it was looking for greater powers beyond its current remit. This latest move makes good sense. Without significant public sanctions, there is no sense of accountability at boardroom level in the public eye, and then no hope of building trust between business and its stakeholders.

But as the Financial Times reported this week, banks and financial services firms have collectively been pardoned £1.2bn of misconduct fines over the past four years. A 30% discount is apparently available to any institution that settles with the Financial Conduct Authority if they settle in the ‘stage one’ period.

In an indication of new thinking in changing times, the FT reported that a Liberal Democrat peer, Lord Sharkey, wants firms to only get a discount on their fines if they agree to hold someone personally responsible for the failings and take disciplinary action. It also emerged in the FT report that only eight firms paid their full fines.

Sanctions are clearly needed. But they are also only one (limited) way of creating better corporate governance. Inevitably, they occur in hindsight, after considerable damage is done.

Better corporate governance is not about sanctions, or about rules and regulations, but about having more effective boardrooms, with the right people in place doing a professional job – and expecting to be scrutinized while doing so. We spend a lot of time in helping to build effective boardrooms, as well as in building effective individual directors to play their part within them.

Looking at plc boardrooms, there are several things to consider if we are honestly rethinking our framework of corporate governance, and whether it is fit for purpose. Firstly, despite all the initiatives, Britain’s boardrooms are far from representative of society – not just in terms of the lack of women, but also in the lack of non-white faces around a boardroom table.

The Parker Review has at last shone a much-needed spotlight on that truth. But it remains to be seen whether it is a priority in a post-Brexit environment. Just 1.5% of directors of FTSE companies are non-white UK citizens, even though ethnic minorities make up 14% of the UK population.

Recruitment by executive search firms from a familiar and entrenched talent pool reinforces the status quo – but they have not really been called on it.

The UK not only needs diverse ethnicity and race around the boardroom table, it needs innovative minds, including those who understand what it takes to achieve digital transformation. Those candidates may well not be in the existing executive search candidate pool, if only because they are young and have not yet served on a plc listed board.

If we open up the possibility of younger candidates as boardroom directors in listed businesses and propose a broader demand of professional qualifications for non-executive – or ‘independent directors’, we could take two steps forward at once. Independence of directors is one of the areas in which the FTSE 350 does not always tick the corporate governance boxes – again in part because it is all about recruitment from the same pool of talent.

An effective board is also a board that puts itself up for regular yearly evaluation, by an independent third party. Despite the emphasis placed by the FRC on reform of corporate governance with a focus on succession planning and board evaluation, nothing has changed in this regard.

We need a code for board evaluation –it should be an annual event and one for which every board member is available for scrutiny and 360-degree appraisal. Good board evaluation should reveal an understanding of organizational culture. If that does not happen, it is a red flag, an early and useful marker of concern.

Effective boardrooms, if achieved, will remove the angst around Codes of Corporate Governance. The UK Corporate Governance Code’s achievements are many and its critics are few. But at the end of the day, debate after 25 years is essential, as is challenging an existing mind-set.