2003 - Boardroom reform
It was difficult to ignore the
chorus of complaints this week from the highest
quarters of Britain's biggest companies, where
chairmen have been queuing to take a swipe at
the boardroom reforms proposed by Derek Higgs.
Increasing powers for non-executive directors
would divide boards and undermine the power of
chairman, said most of those canvassed by the
Borrowing the immortal words
of Mandy Rice Davies, I find myself suggesting:
"They would say that, wouldn't they?"
In fact, while some of the CBI findings are consistent
with those gleaned by Russell Reynolds, the headhunting
company, just two weeks after the publication
of the Higgs report in January, overall opposition
to the reforms appears to have hardened.
The Russell Reynolds survey,
based on conversations with 30 FTSE chairmen,
questioned about half the number that responded
to the CBI survey and produced a far less hostile
response to that registered in this week's report.
But that was before most of the chairman had had
the opportunity to find a collective voice.
In fact, the Higgs report was
"warmly welcomed" by chairmen initially,
according to Russell Reynolds. A month on, opinions
have become entrenched.
Most complaints appear to have
focused on the recommendation to appoint a senior
independent director, widely regarded by existing
chairmen as divisive, particularly since it involves
reporting back to shareholders. In other words,
chairmen are viewing this figure as a "shareholders'
nark" who could undermine the unity of the
The sentiment is understandable
but the shareholders deserve to have a more effective
conduit to the board - a person who may be more
sympathetic to their concerns than has sometimes
been the case in the past. Even so, it would not
help if the post were to lead to the emergence
of hostile camps on the same board.
It is tempting to view the Higgs
report as revolutionary in its attempts to create
greater boardroom independence. Those who do might
like to consider this statement: "The board
will be stronger and more effective if it is genuinely
an 'outside' board, the bulk of whose members
have never served as full-time officers of the
Who said this? Patricia Hewitt,
the UK trade and industry secretary, perhaps?
In fact, it was Peter Drucker, writing nearly
50 years ago in The Practice of Management. "What
is needed on a board is not people who agree with
management anyhow, but people who are likely to
see things differently, to disagree and to question,"
Mr Drucker was convinced of the
merits of independent directors. "Both the
large and the small business," he wrote,
"need board members whose experience, outlook
and interests are different from those of the
management. This cannot be obtained by getting
representatives of the company's bankers, suppliers
or customers. It requires people whose entire
background is different from management."
If Mr Drucker, one of the most
highly respected commentators on the organisation
of business, could have reached this conclusion
in the 1950s, why should it cause so much boardroom
anxiety today? Chairmen complained to Russell
Reynolds that spreading the net to include lay
directors could lead to "dumbing down".
A bit of dumbing down may be
no bad thing if it results in simple, honest,
even naive questions from at least one side of
the table. Too often board members have been reluctant
to ask the obvious question, either because they
do not want to rock the boat or because they are
afraid of appearing stupid.
A recommendation by Mr Higgs
that a chief executive should not become chairman
was described by 40 per cent of those questioned
in the earlier survey as "too prescriptive".
There might have been some merit in such a comment,
had the Higgs report taken any other stance than
its relatively liberal "comply or explain"
"My worry is that too many
companies will not take advantage of the opportunity
to explain a decision that might appear contrary
to the spirit of the recommendations. I suspect
that most will fall into line behind the base
recommendations," says Sean O'Hare, a partner
at Mercer Delta Consulting, boardroom advisory
Therefore, the decision by Tesco
last week to appoint David Reid, a former executive
director, to the chairmanship should not be seen
as defiance of Higgs, as long as the board has
established that the move is in the best interests
of the company. A sound rationale can demonstrate
good governance - probably more so than blind
compliance with a list of dos and don'ts.
One area of Higgs that may need
revision, however, is the recommendations covering
tenure of non-executive directors. It can take
time for a non-executive director to become an
effective member of the board. Just as these directors
have reached their peak of effectiveness, they
are expected to stand down. It seems a waste of
The Higgs report was always going
to be good for consultants so we should not be
surprised by the considerable interest in board
evaluation emerging among headhunters . Many search
firms already have board evaluation practices
that grew with the rise in merger activity at
the end of the 1990s. These same practices can
now be directed towards carrying out evaluations
of board competence. But companies would be prudent
to avoid using the same people for evaluations
as they have used for recruiting members of the
board. Therein lies an obvious conflict of interest.
Whatever the outcome of the Higgs
report, there seems little likelihood that companies
will avoid costs associated with compliance, recruitment
and pay for boardroom duties.
The biggest prize is the possibility
of creating a broader population of independent-minded
non-executive directors. Another benefit will
be a more professional relationship between non-executive
directors and the executive. But this is unlikely
to occur without tensions arising from the added
accountability of stronger governance.
For generations, companies have
been at the heart of the capitalist system. It
is in the nature of competition that some will
go bust from time to time, sometimes spectacularly
so. The art of good governance is to maintain
checks and balances while leaving executives the
freedom to make a business sing.
If the best of the Higgs report
survives intact, chairmen of good companies will
still remain "first among equals" but
poor chairmen may find it harder to survive. Why
should we worry about that?
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