Higgs and All That
Business Voice, March 2003
The corporate scandals in the United States continue to have their repercussions. Fund managers seem to have lost faith in the reliability and quality of company reported earnings. Employees are cynical about the business ethics of their bosses. Even high-flying students are reluctant to seek employment with many blue chip companies. In short the impact has been traumatic, extending beyond recent stock market falls.
Our response on this side of the Atlantic has been to review the state of corporate governance, to re-establish the rightful legitimacy of business leaders and to review the conduct of the corporate board room. The Higgs Report has been the result. On the whole, the business community has responded favourably to its recommendations. These are now well-known and include proposals that chief executives should not become chairmen of the same companies. That at least one-half of the Board should be non-executives, and that more of them should be selected from the none-commercial sector. It also suggests that senior independent directors be appointed that act as a 'direct route' to shareholders.
In theory this all sounds fine. But the reality can be quite different. Certainly the role of the non-executive director needs beefing up. Too often it is the case that non-executives will simply rubber stamp the proposals of those who are running the business on the grounds 'they know best'. Equally, many company chairmen regard their non-executives as merely available to offer the 'general, non-expert' view. The outcome, drawing on my own experience as a non-executive director, is that most boardrooms are cultures of comfortable compliance rather than of healthy discussion and debate.
But it does not have to be like this. Certainly, legislation will not solve the problem. I have sat on the Boards of companies where there is healthy debate and the executive directors' proposals are put to the most detailed scrutiny. In my experience, these are the better performing businesses. Essentially, it all depends on the personality and attitude of the chairman and how meetings are managed.
There are sometimes good reasons for separating the roles of chairman and chief executive. But even here there are no cast iron laws that can be applied. Are we to ask every entrepreneur who sets up and grows a very successful business to step aside and make way for an 'outside' chairman? My guess is that Sir Ken Morrisson, currently bidding for Safeways, is not too pleased with that suggestion. Nor the very many other successful businesses where the roles are combined. And so how do we square Higgs with this reality?
As always, the answer is with a pragmatic approach, leaving it to the knowledge and wisdom of senior management teams and their non-executive colleagues to decide what is appropriate for the particular circumstances that they face. Any self-respecting executive chairman will bow to these wishes and act in the best interests of the company. My guess is that this is already the case with the overwhelming majority of companies. Legislation, in my view, is not the way forward. The practical legacy of Higgs should be to shape the culture of boardroom conduct, to set the benchmarks according to which companies can assess the quality of their own conduct.
Higgs seems to attach a lot of importance to the role of non-executives. Hence, his suggestion that a list of potential candidates from the non-commercial sector be drawn up. With the DTI turning to Prof Laura Tyson, Dean of London Business School, to broaden the pool of candidates for FTSE 100 companies, can we expect this list to consist of a preponderance of women and business academics? I am all in favour of company boards having a broader representation of the wider community if they are able to bring something to the party. Recently, I gave a presentation at a corporate event of a major retail bank. I was staggered to find that all the directors were white men with an average age of 58.3.
This is clearly not appropriate, in view of the rapidly changing consumer markets that the retail banking community has to respond to. Such boardroom demographics are likely to sustain a culture that is remote from the market and to lead to ill-judged strategic decision making. As any successful entrepreneur will tell you, empathy or feel for the market place is vital for leading-edge business success.
But again, it depends on the company. Sir Ken Morrison, has built up a very successful company without non-executive directors. He thinks they are a waste of money and I suspect, in his case, he regards them as lacking focus, commitment and that they are a barrier to fast strategic decision making.
Higgs seems to assume that non-executives are the repositories of all that is right and knowledgeable. But I wonder to what extent the difficulties that the technology, media and telecommunications now find themselves in is not a result of the excessive influence of non-executive directors? How far did they accept the hype of the 'new economy', drawing upon the financial press, which their executive colleagues were then unable to resist. It would be interesting to hear what George Simpson and Ian Vallance have to say about this in view of Marconi's and BT's strategic decision making at the time.
But perhaps one of the most difficult to swallow of Higgs proposals is that senior non-executive directors should attend regular meetings with shareholders, in the absence of the chairman. It seems to me that this would grossly undermine the role of the chairman and lead to a range of boardroom tensions.
Overall, the Higgs Report makes sensible reading. But it is difficult to see how legislation can play a meaningful role. If that was to happen, corporate governance could become even more invisible. Chief executives, chairmen and their trusted colleagues could simply choose to meet informally to tackle the major issues. Of course, the alternative is to adopt the two-tier board structure favoured in the Netherlands. But do we need this? Mr Higgs' recommendations, in trying to please all parties, if implemented, could lead to the worst of all the unintended outcomes. In some matters we are better than the United States. Corporate governance is probably one of them, with our companies already subject to a great deal of public scrutiny.
© Professor Richard Scase