The end of October proved a corporate governance marathon in London and debate raged as to how our leading companies should be governed. Which codes and rules should Boards follow to meet the demands of stakeholders with, at times, very different agendas? Power, wealth and influence are at stake so strongly held and conflicting views are to be expected. The argument needs to be had. But easy answers aren’t forthcoming. As a Search consultancy, Fidelio offers a way forward: our simple recommendation is just focus on who is sitting round the top table.
The sudden importance of Board culture
London was obsessed with governance at the end of October as the great institutes, professional bodies and business schools debated what had gone wrong at Board level and how this can be fixed.
In short succession Fidelio attended seminars and debates at the Institute of Directors, the Cass Business School, as well as a Chairmen’s forum. The theme was also picked up in the business press. The Economist’s lead article of 24th October tackled “Reinventing the company“, while on 23rd October the FT flagged “Vote of no confidence in shareholder capitalism”.
Far from consensual, this debate on governance represents a mighty clash of opinion as to the way forward.
To kick off, the Institute of Directors co-hosted an excellent panel discussion with the Institute of Chartered Secretaries and Administrators (ISCA) on “Corporate Culture and the Board” that included an eminent cast of corporate, government and regulatory speakers.
Some major themes emerged. The UK government may be loath to impose another heavy layer of regulatory requirements on companies but public disillusionment with business remains intense. Politicians ignore this at their peril. Moreover a simpler world of shareholder primacy is now behind us and Boards clearly need to become better at understanding stakeholder expectations. These are often complex and contradictory.
Corporate culture needs to improve; but how? And how should such progress be measured?
Private versus public Boardrooms
The question as to how the Chairman adds value in a Private Equity portfolio company was explored at a private Chairman’s dinner. Highly experienced Chairmen illuminated two very distinct roles. The Chairman in a quoted company can become a very lonely position. Expectations are great, public scrutiny intense and how to get things done is increasingly prescribed. In the Private Equity world there is a much simpler alignment of roles between owners, Board and managers – and usually great clarity of purpose.
In a similar vein in its leader “Reinventing the company”, The Economist highlighted how effectively Silicon Valley start-ups and titans have organised their governance structures.
Indeed, Fidelio recently discussed the very high expectations of public companies and their Boards on the BBC Radio 4 business programme – The Bottom Line. We raised the important issue of Board composition: quoted Boards are expected to include women. In some countries this is mandatory. In privately held companies there is no obligation, although the court of public opinion is increasingly wary of non-diverse organisations.
“….the final awakening in the public’s mind that there is a strong possibility that those elected or selected to guide our organisations in the private and public sectors may not be very good at their job.”
– Professor R. ‘Bob’ Garratt, The Fish rots from the Head
Cass Business School picked up the baton with a very well attended debate “Is corporate governance past its sell-by date?” Professors Bob Garratt and Hugh Willmott amicably adopted distinct positions. As befits an academic institution, the discourse moved rapidly to a highly precise discussion of who does own the company. Shareholder primacy was debunked. What the shareholder owns is the dividend stream not the company. This, however, creates a vacuum in the corporate ownership structure that is very difficult for companies, shareholders and stakeholders to deal with.
Certainly layer upon layer of increased regulation and ever more extensive governance codes have not averted recent corporate scandals and crises. One proposed solution is a professionalisation of the Board of Directors. Seemingly innocuous, there are also hidden risks in creating a new caste of overseers, who are incredibly well-versed in all matters of governance but potentially distant from the commercial reality which is core to business.
Back to governance basics
This Overture cannot possibly do justice to the complexity of the very fine arguments made at each of the discussions. But we hope to have highlighted the volume of debate, the intensity of opinion and diversity of perspective about how companies should be run in future.
We absolutely welcome argument and diverging views on this important subject. Fidelio’s working definition of business leadership is the capacity to deal with complexity and to find a way forward to achieve corporate goals through often competing shareholder and stakeholder demands. As such we are very sceptical of easy corporate governance solutions.
In reality Boards exist where interests collide and that is never a comfortable place to be. But precisely because interests and accountability come together in the Boardroom, it matters enormously who is sitting around the Boardroom table. Non-executive Directors may have access to only a fraction of the information available to their executive counterparts. This makes the calibre of the Non-executive Director all the more important.
We recognise that there is no simple answer to what good governance should look like.
Instinctively we side with Bob Garratt’s view that the seven directors’ duties set out in The Companies Act 2006 provide a jolly good foundation for Board effectiveness.
1. To act within the Board’s constitution
2. To promote the success of the Company
3. To exercise independent judgement
4. To exercise reasonable care, skill, and diligence
5. To avoid conflicts of interest
6. Not to accept benefits from third parties
7. To declare interests in proposed transactions
Directors’ duties represent what needs to be done. And the question that should follow hard on the heels is who do we need to do it? If we want healthy, vibrant, law-abiding and profitable companies, we should be as energetically debating Board composition as we are corporate governance.
“The secret of my success is that we have gone to exceptional lengths to hire the best people in the world.”
Steve Jobs (1955 – 2011)
To be clear, there is no one-size fits all profile for a good Board Director. A fast growing technology company behaves differently from a FTSE 5 behemoth. So the Boards should also look different, albeit with the obvious common denominator of observing Directors’ duties.
Different routes to the Board table
The business landscape is changing fast with technology disrupting business models, cyber-attacks threatening day-to-day operations and public trust of large companies at a concerningly low level.
Boards are composites and this provides great opportunities to bring very different skill sets and experiences to the Board table. Yes, deep sector expertise is important, as is a wise head on experienced shoulders. But there is a much greater talent pool available to Boards and good Chairmen ensure that they are widening not narrowing routes to the top table.
In the Cass debate, Bob Garratt flagged how difficult it is to pin down what a good culture is and implicitly what a good Director looks like. The seven deadly sins and the seven virtues represent two extremes by which to judge Directors. We agreed that charismatic leadership much beloved by employees, investors and the media sadly sits between the two!
Neither regulators nor investors are skilled at identifying and appointing good Directors. This is not their job. But they do have an important role to play in asking challenging questions about how Board appointments are made. For example, how does the Chairman / Chairman of the Nominations Committee ensure the most rigorous selection process which (a) provides access to the broadest range of potential Directors and (b) also results in the best possible appointment?
Search for governance and choice for Chairmen
Just as in banking, politicians are keen to keep the big players on their toes by developing healthy challenger banks, so Board diversity and effectiveness will benefit from a thriving and challenging Search industry.
Chairmen should have choice when they consider Board refreshment and Board development. This matters because the strongest guarantor of good governance and healthy corporate performance is having a highly effective top team – at Board and executive level.
Yes, the governance debate should absolutely rage on. It’s a healthy indication of corporate renewal. In parallel, we strongly advocate clear focus on the calibre of the people sitting at the top table and what they collectively and individually bring to the Board.
Board diversity in skill sets, experience, gender and age stands the company in good stead, particularly in the face of disruption to its business model. And, importantly, the very existence of robust, effective and diverse Boards is also a major contributor to enhancing governance.
FIDELIO HIGH NOTES
- Fidelio’s Board Practice is committed to building the layer of Senior Female Executives. We hold our second “A Seat at the Table” Programme on 15th -16th March 2016 at Leeds Castle.
- Fidelio hosts a Board Breakfast on the implications of shareholder activism for Board Directors and Board composition.
- Fidelio’s Search Practice sees a fundamental shift in the Corporate Affairs function and roles within the team.
- The CFO’s Cabinet – subject of forthcoming Fidelio Breakfast.
- Fidelio is active on IR Search across Europe and also co-hosted with Citi DR Services “The IRO is a Strategic Advisor to the Board – True or False” roundtable debate with FTSE and CAC senior IROs in London and Pairs. See key summary. Next debate takes place in Frankfurt on 4th December. Contact Shu Zhang for more information.
To discuss your Search and Development requirements, please contact us at info@fideliopartners.com