Corporate governance: Non-exec stress

Non-executive directors will no longer be able to look forward to cushy jobs as a result of being part of the old boy network.

The incoming combined code on corporate governance is set to dramatically increase the profile and importance of non-executive directors and their corresponding workload.

Steve Marshall, former chief executive of Railtrack, says: ‘Nomination committees have played very safe in the past. Skill sets and everything else don’t necessarily get looked at adequately. If you’re on a divisional board, its very difficult to then become a non-exec at another plc. But I think that will be forced to change because otherwise, where are the people going to come from?’

With only a few weeks until the code becomes effective on 1 November, top companies will have to recruit many more non-executive directors to comply with the code in full.

According to research carried out by Deloitte, around 30% of FTSE350 companies are still not compliant with the ‘best practice’ require-ment that at least half their board members should be independent non-executive directors.

As more non-executive board members are recruited for their skills rather than their contacts, the code is also expected to diminish the number of directors holding a dozen or so non-executive directorships in diverse businesses, some of which they may not know that much about.

The code will increase the number of corporate governance principles from 14 to a total of 35.

Tim Copnell, director at KPMG, says: ‘It is no longer realistic that one sits on the nomination committee, remuneration committee and the audit committee. Having non-executive directors as a cosy club has to be wrong.

‘The time has come when non-executive directors have to contribute and demonstrate their skills. If they do know about the business they should start asking those probing questions,’ adds Copnell.

Under a ‘comply or explain’ framework, listed companies are not obliged to comply with the new code in full but they have to provide explanations in the annual report about any areas where they may be non-compliant.

Non-complying companies could risk a backlash in negative publicity and friction with concerned investors.

But Copnell believes it may not be in companies’ interests to mount a frantic rush to comply overnight.

‘There is pressure from some external investors to react. But it would be wrong if there’s a rush to comply with the code.

‘If a company goes out and hires x number of executive directors before the end of the year just so they can be compliant, they might not be that successful in getting the best people on board,’ says Copnell.

In the long term however, there is much hope that the code will lead to better-qualified non-executive directors who can ask the right probing questions to stop things going wrong.

‘It will blow the cobwebs away. The biggest challenge in the UK is averaging out the calibre of individuals,’ says Marshall.

While nearly one in three top companies remain non-compliant, the Deloitte research showed that the top companies have made at least some progress this year in add-ressing the board balance issues raised by the code.

The number of non-executive directors has increased by 2.5% so far in 2003 as the number of executive directors sitting on FTSE350 boards has fallen by 8%.

Rupert McNeil, partner at Deloitte, says: ‘The recruitment pool will have to widen as companies search for additional non-executives.

‘Greater transparency and better communication can only benefit companies and shareholders.’

In its report, Deloitte also rejected accusations that boards had become far too cosy.

However, the research found that 95% of FTSE100 companies and 90% of FTSE250 companies have at least one member of the board who has another board position at a FTSE350 company.


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