Ho Ho Ho! A belated Happy New Year. And what did Santa Claus bring you last Christmas? Oh, how wonderful, a new UK corporate governance code? You must have been so excited. Did you sit down and read it straight away? Or is it on your too-difficult pile, together with the last revision and the one before that?
Experienced non-executives will know that the revision process is likely to take some time and only the most diehard will contribute. I have to admit, it has not even hit the discussion agenda of my boards, let alone prompt any of my chairs to circulate a draft response.
You have to ask yourself how seriously non-executives really take the UK Corporate Governance Code; not in terms of its individual statements, but its whole intent. We certainly have views on its individual components, but we don’t generally hear discussions about the need, effectiveness or purpose of the code itself.
And that is where I think the problem lies. What is the code for? Until we can answer that question, it is hard to say whether the latest revision is an improvement or not. We will respond again to the component elements from our particular boards’ perspectives: Do we have a CEO salary issue? Do we have a chair who has outstayed the new “independence” guidelines? And so on.
Longevity and stability
What we should be considering is whether the evolution of corporate governance codes over the past 40 years has improved the longevity and stability of corporate financial and employment returns.
This could be measured by tax take, revenue growth, dividend return, environmental sustainability, critical resources or charitable contribution. Or, perhaps, by the number of employees, average salary, length of employment, and internal progression, for example.
Or, we should be asking whether it has reduced the number of frauds, bribes, whistleblower incidents, tax scandals, hacks and accounting irregularities. Also, could we compare the efficacy of different international governance regimes, much like there is a corruption index?
The subject of the moment for business-related undergraduate dissertations is to compare the “effectiveness” of the corporate governance structures of Germany, the USA and the UK. Yet not one student has offered me a measurement for effectiveness, let alone acknowledged that one is needed.
Could this be why boards so seldom define what they measure their board evaluations against? A “balanced scorecard” for boards—what would that look like? We used to talk a lot about these for managing businesses when we were “proper” working people. Perhaps if we viewed governance in this way, we would get further with its relevance to current-day organisations.
A more balanced way of looking at corporate governance would be to recognise that delivering the sort of effective measures I suggest above is based on the complicated interaction between a number of different forces: boards, management, shareholders, investors, employees, sustainable resources, auditors and regulators.
The role of the board should be as conductor of these various forces, ensuring that the balance between them is correct, given the music that is being played, the audience, the acoustics of the hall and the capability of the musicians. Until then, the revised UK code—which awaited your feedback by 28 February—remains a one-dimensional, component-led piece of writing without overall direction or measurements of purpose.
Is it better than the last? Well, that will depend on your view of whether the 19% of FTSE 100 chairs who have served more than nine years remain independent or not; or, whether you think that employees will have any useful voice to present to a board; or whether remuneration committee chairs are right to not exercise their discretion when a bonus scheme produces a gross and unexpected result, such as Persimmon.
What a great agenda item for the first post-Christmas 2018 board meeting. Thank you Santa (but please, can I be on the naughty list next Christmas?)
The Secret NED is a current British board director with 30 years’ experience, who has worked on boards in the FTSE 250, small-cap companies and private, family-owned businesses.