The trauma of the UK’s Brexit vote has raised significant questions about governance – governance of the country, of our institutions and our companies. So when better a time for Fidelio, with our focus on Board composition and Board effectiveness, to host a breakfast on the future of Corporate Governance?
On 12th July, less than three weeks after the vote that shook the UK, Fidelio welcomed Professor Bob Garratt, Visiting Professor, Cass Business School, as a guest speaker at a Fidelio Board breakfast. His subject: ‘Corporate Governance is dead. Long live Corporate Governance’. Bob is an internationally recognised Corporate Governance expert and also Chair for the Centre for Corporate Governance in Africa at the University of Stellenbosch. Bob is also author of the seminal work The Fish Rots from the Head (1996) and the upcoming Stop the Rot: Rethinking Governance for Directors and Politicians (2017).
Following Fidelio’s usual format we asked Bob to address three questions:
- Have we significantly overcomplicated Corporate Governance?
- How do you change or regulate values and culture without substantially redesigning governance?
- What does the future of governance look like?
Fidelio was joined at the breakfast by Chairmen, Non-Executive Directors and Company Secretaries from a range of sectors and geographies, including Financial Services, extractive industries, retail and not-for-profit. We enjoyed a lively discussion which went to the heart of Board effectiveness and the key themes are summarised below.
Too Much Governance?
The starting point for our discussion was the perceived strength of the UK Corporate Governance Code which undoubtedly attracts businesses to list in London and investors to invest in the London market.
Bob acknowledged the ambition and achievement of the 1992 Cadbury Report but he also argued that subsequently UK governance has become over-complicated and in its current form is “past its sell by date”. While the 2006 UK Companies Act sets out succinctly what is expected of Directors, regulators have effectively built up an elaborate edifice which Bob argued obscures the simple clarity of the law.
Consider, for example, the role of the Director. In the Companies Act, a Director is a Director is a Director. The Corporate Governance Code distinguishes between Non-Executive and Executive Directors and in Financial Services we have further distinctions in accountability with Accredited and Non-Accredited Directors.
While these multiple layers of elaboration have certainly added complexity, there remains a strong sense of public opinion that Corporate Governance has failed. It is of note that as the UK’s new Prime Minister assumed office, she chose to highlight corporate excess and call for more responsible capitalism. Bob’s response to this clarion call was clear – rather than more governance oversight, we need simpler structures. In effect, we need to go back to basics.
The Problem: The Seven Deadly Business Sins
Bob’s practical and academic work takes him around the globe advising on governance across highly developed capital markets, as well as in rapidly evolving markets in Asia, Africa and the Middle East. In this context, Bob noted that viewed from afar Western Corporate Governance has been compared to the Seven Deadly Sins – with the emphasis on greed and pride.
Indeed, as our discussion around the breakfast table demonstrated, disquiet about excessive executive pay remains. Bob joined many leading voices in governance arguing that aspects of guidance on Executive pay have exacerbated the situation. Over-reliance on remuneration consultants has led to complexity; while benchmarking and greater disclosure have ratcheted up pay.
Bob did not claim that UK governance suffers from moral bankruptcy. But he did note a disconnect for many people between personal values and corporate values and how this can create great stress at work. In the Boardroom this can lead to individual Board Directors feeling isolated. Bob also noted that when he asks Board Directors to cite their duties under the Companies Act they frequently look shame-faced! All in all the sense of purpose and orientation is lacking.
The Solution: Tearing Down the Edifice
So what is the solution to this lack of direction? Radically Bob proposed tearing down the edifice of the Corporate Governance Code and replacing it with a two-page document. On the front would be the values for the organisation, reflecting company law:
1. Accountability
2. Probity
3. Transparency
On the back would be the much-overlooked Seven Duties of Directors:
1. To act within the constitution of the company
2. To promote the success of the company
3. To exercise independent judgement
4. To demonstrate due care/diligence/skill
5. To avoid conflicts of interest
6. Not to accept benefits from third parties
7. To declare an interest in a proposed transaction
Continuing in this vein, Bob also suggested removing the responsibility for Corporate Governance Guidelines from the Financial Reporting Council. He argued that governance is not just about reporting and suggested this contributed to a tick-box approach.
Several countries that are currently shaping their Corporate Governance framework choose to do so under the auspices of a Corporate Governance Council which can adopt a much broader approach. Bob also noted the best time to re-wire governance is in the immediate wake of a crisis and cited Sir Richard (Dick) Olver’s overhaul of governance at BAE Systems in the wake of the Serious Fraud Office Investigation in 2010.
Ownership Structures
Our guests appreciated the clarity of Bob’s radical recommendations. But there was also pushback, including from Directors sitting on Financial Services Boards who appreciated what the regulators are seeking to achieve in terms of ensuring accountability. They also argued that many Directors would feel exposed with just the Directors’ Duties; the regulators’ interpretation of these Duties could be onerous but ultimately supported Directors in discharging their role.
A lively discussion also took place as to whether good corporate governance is easier in some types of organisations than others. For example, do “not -for-profit” Boards, free from the profit imperative, lend themselves to better governance? Or is good governance simply easier for a partnership such as the legendary John Lewis?
Our guests were clear that quarterly reporting for quoted companies drives behaviours and sometimes unwanted behaviours. But there was also pushback both from Fidelio and from Chairmen and Directors of quoted companies at our table. They argued listed companies can pursue a longer term strategy. They can also ensure that remuneration policies are in place that are simple and well understood. Effective engagement with shareholders is critical, as is good communication. And the Chairman and Board should take a keen interest in this.
But Bob also drew our attention back to the Directors’ Duties – there is no duty to pursue short-term profit but rather to promote the success of the company. And surely this is the lynchpin of governance for all companies and organisations.
Conclusion
Fidelio’s Board breakfast on Corporate Governance proved a healthy exercise in iconoclasm very much in keeping with the mood of the post-referendum UK. There was recognition that the simple responsibilities of the Board of providing oversight, while ensuring strategic direction and momentum are far from easy to achieve. Few of our guests felt comfortable relying on nothing but Bob’s radically reduced Corporate Governance Code. But the focus on these two pages certainly brought clarity to the discussion and arguably allowed for a new connection to be made between personal values and corporate values.
For further questions on good governance, Board effectiveness and Board composition, as well as Fidelio’s “A Seat at the Table” development programme for senior female executives, please contact Gillian Karran-Cumberlege, or alternatively call + 44 (0) 20 7759 2200.
Speaker Biography
Professor Bob Garratt is an internationally recognised expert in Corporate Governance and author of seminal works in the fields of Board and Director Evaluation and performance, large-scale organisational change and strategic thinking. He has been an expert on the project for the reconsideration of the governance of the International Monetary Fund in Washington DC and lectured in Corporate Governance for the governments of Australia, India and South Africa. He is a Founder Member of The Commonwealth Association for Corporate Governance; a Visiting Professor at the Cass Business School, City University, London; and the Chairman of the Centre for Corporate Governance in Africa at the University of Stellenbosch. He has written extensively on Board Development and his books include The Fish Rots from the Head: Developing Effective Board Directors (1996) and The Twelve Organisational Capabilities: Valuing People at Work (2001) as well as the upcoming Stop the Rot: Rethinking Governance for Directors and Politicians, due to be published in March 2017 by Greenleaf Publishing.