A Board has collective responsibility. Nonetheless, it can be lonely and exposed sitting on a major public Board. Shareholders have never had much tolerance for management failure to deliver on earnings. Now Boards which preside over a collapse in earnings also feel shareholder ire. In the UK, regulators and legislators are turning up the heat on Boards with increased liability and new criminal offences entering the rule book. Some in the media fret that the best and the brightest will turn their backs on the corporate boardroom. As a Board Search consultancy we disagree.
Quite rightly, Chairmen of public companies are thinking very carefully about the effectiveness and calibre of their Boards and the quality of the pipeline. Recently we were, therefore, pleased to deliver an Internal Board Development Programme for a leading Financial Services company.
The goal of the Development Programme was to look through the tsunami of regulation and compliance confronting Boards in Europe and the US. As such, we focused on the essence of what it is to be a Board Director. The Directors’ duties set out in the Companies Act 2006 represent a good “back to basics” starting point.
Directors’ Duties
- Duty to act within powers
- Duty to promote the success of the company
- Duty to exercise independent judgement
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interests
- Duty not to accept benefits from third parties
- Duty to declare interest in proposed transaction or arrangement
These are tough but clear imperatives for Board Directors and create the basis for a very healthy discussion on what it is to be a Director. For the participants in our Programme the question that was uppermost was “what is my liability?” And can we blame Board Directors, particularly in the Financial Services sector, for being concerned?
The challenge
Banking has certainly come a long way from the light-touch regulation that preceded the 2008-9 Financial Crisis. Regulators are now prescriptive about how Financial Services institutions are run, particularly in the case of banks which are systemically important and/or holding public deposits. The Board is far from immune from regulatory oversight. Board Directors of all US and European banks are now required to bring very specific prior-experience into boardroom.
Recently this has been taken a step further in the UK. Reflecting the Parliamentary Commission on Banking Standards and the Financial Services (Banking Reform) Act 2013, the Bank of England Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) this summer published a consultation paper outlining the Senior Managers Regime. Senior Executives and Directors will potentially be held not just accountable but criminally liable for actions that cause a financial institution to fail.
The UK press has been keen to point out that senior Executives and Directors suspected of such reckless behaviour will be presumed guilty until proven innocent. There has also been much media coverage of announced subsidiary Board level departures from HSBC, a leading global bank, which have been popularly interpreted as a protest against the proposed new regime.
If you are the chairman or the head of the risk committee, you have a responsibility for the activities of that institution…If you don’t think you can do it, you shouldn’t be on the board
– Mark Carney, Governor of the Bank of England, quoted in the FT, ‘If you can’t take the heat, get out of the boardroom’, Chris Giles, October 12th 2014
Measures introduced to promote greater oversight and accountability in the banking sector have a habit of spilling over into other sectors. Again in the UK, the Enterprise and Regulatory Reform Act 2013 potentially makes the Remuneration Committee liable for any payments to directors which fall outside the remuneration policy approved by shareholders. While breaches are unlikely to be pursued aggressively, this new regime is a stark reminder of Board responsibility.
Indeed in recent years remuneration has become something of a battleground for shareholders and Boards. This is against a backdrop of increasing anti-business sentiment buoyed up by a sense of heightened inequality. Board Directors do well to remember that Thomas Piketty’s tome, Capital in the Twenty-First Century, has reached unlikely best-seller status even in the US. It is no surprise that “excessive” Executive pay and “weak” Boards have become an easy target for the populist press and politicians.
A second, and related, minefield for both corporate Executives and Boards is expectation management. The markets have always hated surprises, and short shrift is given to companies that wrong-foot their investors, particularly on the down-side.
Tesco, a leading retailer and mainstay of the FTSE 100, is currently facing regulatory and criminal investigation into a £263 million profit overstatement. Shareholders have responded by aggressively selling the stock and the world’s most celebrated investor, Warren Buffett, has described his willingness to retain a large holding, while both earnings and share-price declined, as “a huge mistake”. There has also been relentless attention and analysis of the Tesco Board with pundits proclaiming loudly on the lack of retail expertise among Non-Executive Directors.
The regulatory and media furore surrounding Tesco has taken its toll with a number of casualties at Executive and Board level. Most prominently, the Chairman, a highly regarded City figure, has announced his resignation.
It is clearly not an easy time to be sitting on a major public Board in the UK. There is heightened expectation of accountability from shareholders and regulators. But there is also a clear uptick in the blame culture. The voracious appetite of the media, and of social media in particular, means that heads must roll when there is a crisis.
Companies are designed to stay in business rather than to be good at defending their bosses from scandal.
– Schumpeter, ‘Beware the angry birds’, The Economist, October 11th 2014
In a recent BBC radio interview Simon Stevens, the CEO of the National Health Service (NHS), makes a plea to politicians to stop interfering. In response a number of health service professionals highlighted the blame culture in the NHS; specifically when a problem arises the focus is on finding scapegoats, which can overshadow clear thinking about the failure in process.
Critics have also warned that the fear of vindictive and very public blame can paralyse good and bold decision making. If Boards shy from the Directors’ duties set out above for fear of blame, our leading companies and institutions cannot flourish.
There is no denying that it is tough being a Board Director and has recently become tougher. But from Fidelio’s vantage point of day-to-day contact with companies, Directors and their investors we remain optimistic.
Reasons to be optimistic
Firstly, as a Search firm we continue to see a number of very talented Executives put their names forward for Board roles. Typically financial remuneration is not paramount, and a number talk of giving back at Non-Executive level after enjoying very successful and rewarding executive careers.
It is true that Directors are wary about putting their names forward for Financial Services Boards. Those who do not have the requisite experience are well aware of it and do not put their hats in the ring. Nor do those who sense that there may be regulatory resistance. And yet there are still good candidates ready to step forward, happily from diverse backgrounds.
This is our second reason for optimism. We see Chairmen giving considerable thought to the complex task of stakeholder and shareholder engagement and what this looks like at Board level. One response is Board composition. Introducing Board Directors from different backgrounds can bring a good understanding of stakeholder interests into the boardroom. Alternatively, Board Development is a tried and tested mechanism for allowing the Board to consider various and, at times, challenging stakeholder views.
Greater diversity at Board level is a step towards greater robustness. Boards require a deep familiarity with the sector and underlying business. A better understanding of stakeholders and shareholders undoubtedly puts Boards on a firmer footing. It leads to better informed governance and decision-making. More prosaically, Boards are better placed to understand the potential public/media response and are more prepared for the blame game.
And that is why we are confident that highly competent, diverse Boards are more resilient and better positioned to deliver value for shareholders and stakeholders. Such Boards are comfortable demonstrating and articulating accountability.
From Fidelio’s perspective two critical factors come into play: a strong and diverse pipeline of qualified and committed Non-Executive candidates; and Chairmen who think critically about the development of the Board. This combination will allow us to move beyond a narrow and negative debate about Boards, Blame and Liability. A more interesting discussion is surely how Directors fulfil their second duty under the Companies Act “to promote the success of the company”.
Fidelio High Notes – Autumn 2014
- Fidelio supports Chairmen and senior Executives in promoting Board effectiveness
- Fidelio explores investor thinking on pay with the Remuneration Committee
- Fidelio Executive Search mandates focus on senior risk, compliance and public affairs roles
- Fidelio’s international remit extends from the US to the UAE. Pan-European focus includes Scandinavia, Germany, France and, of course, Brussels
- Fidelio to host breakfast with the Director of Corporate and Regulatory Affairs, BAT, ‘Questions the Board should ask on stakeholder engagement’
Please contact us with comments or for more information at info@fideliopartners.com