The eagerly-awaited Higgs review sets out a new code of practice for non-executives to promote 'meritocracy' and widen experience across UK boardrooms. Responses have broadly supported its recommendations, but there are some concerns.
Link: Higgs’ special report
Entrepreneurs, not box tickers, are the essential figures needed by companies according ICAEW president Peter Wyman. But it is too early to say whether that is indeed what the Higgs report on non executive directors will produce for UK plc.
Warnings have already been issued that it may be difficult to find enough company directors to fill the requirements laid out by Higgs, but the long awaited report looks, from initial reactions, to have garnered much support.
But it’s a closer look that reveals much of the more interesting detail in the Higgs report. The key recommendations are that the role of CEO and chairman should be separated and that at least half the board meets Higgs’ new test for an ‘independent’ non-executive director.
Independence is a key phrase which will have exercised Derek Higgs enormously over the past few months. But his report contains a detailed new description of independence which he suggests should be adopted into the Combined Code on corporate governance.
The independence test could be the issue that really makes the radical difference to corporate governance in the UK. A non-exec will be considered independent if he considered by the board to be ‘independent in character and judgement’ and when there are no ‘relationships or circumstance’ that would affect a director’s judgement.
But Higgs takes the radical step of advising that this means that an employee would have to wait five years before becoming a non-exec at a previous employer.
In addition a non-exec cannot, within three years, join a board, after being an employee, director, partner or even a shareholder in another organisation which had a ‘material’ relationship with the company.
This could, of course, rule audit partners out of joining former clients as non-executive directors.
On the face of it, this might not prove significant. But this week also saw the Smith report on audit committees advise that at least one person on an audit committee should have relevant financial expertise and training.
Prime candidates for this role could, of course, be audit partners. But they may now find their opportunities are severely restricted by Higgs’ definition of independence.
Such a strict definition of independence raises a question about whether any non-exec would be sufficiently engaged in a company’s entrepreneurial drive. ‘By requiring non-executives to be corporate policemen, companies may find they attract box-tickers, not entrepreneurs, to their boards.
This would ultimately be detrimental to company performance and UK competitiveness,’ said Peter Wyman.