Cadbury NED praise

Sir Adrian Cadbury, whose name has become a byword for boardroom reform, last week gave his blessing to research from the English ICA that confirmed part-time, or non-executive directors are expanding their influence and rewards within Britain’s companies.

Sir Adrian led the original government probe into corporate governance, which called for an expanded NED role. The Cadbury committee opened in 1991 and reported its findings a year later.

Sir Adrian was on hand last Thursday (29 October) to discuss the new research at an institute seminar. The survey was conducted jointly by the institute and management consultancy Egon Zehnder International. ‘I have to say I am heartened by the findings and impressed by the speed with which things have changed,’ said Sir Adrian.

The apparent improvements to non-executive director selection suggest that companies have been falling in line with the Cadbury committee’s recommendations, and subsequent reports, including the Hampel Report.

The most significant finding, according to Sir Adrian, is that more care is now being taken with the selection of directors. ‘The fact was that if you owed your place to the chairman, it was quite difficult to stand up to the chairman when necessary,’ he said.

Methods of appraisal, which Cadbury was keen to see implemented, are also employed in more companies. A quarter of companies responding now undertake formal appraisal of NEDs – in line with the appraisal of senior executives – although they often fail to set out proper terms of reference.

Sir Adrian is also keen to see non-executives devote sufficient time to their duties. He advised company chairmen to ensure that prospective NEDs were certain of the expectations on them and how much involvement was required.

‘Non-executive directors are giving more time to their duties, demands on them are greater and there is a great importance on allowing enough time for them to do this. The non-executive must allow sufficient time to fulfil his duties,’ Sir Adrian said.

Additionally, the balance of non-executive directors to executive directors on boards now averages 50:50. In theory, this increase means that non-executives are able to exert equally as much influence as their full-time colleagues.

But what will these moves actually mean to company boards in real terms?

Only last year, similar research undertaken by Company Reporting found that NEDs were ignoring of a number of key Cadbury committee guidelines, and brought into question claims that NEDs are an effective force in the boardroom.

The research also showed a large number of executives were involved in related-party transactions – doing third party deals linking themselves or members of their families with their companies.

Dr David Tonkin of Company Reporting said the new report makes no mention of the relationship between NEDs and related parties. ‘It would be disappointing if this has not taken the opportunity to discourage the appointment of non-executives from related parties,’ he said. ‘Having a non-executive director who has an interest in a company by way of being a related party, jeopardises his independence.’

Despite Tonkin’s concerns, companies appear to be becoming more selective in their choice of non-executives. Nomination committees are being employed more frequently (from 12% in 1996 to 29% now) to choose candidates. And this approach is also being used in more companies for the final appointment decision – from 32% in 1996 to 52% now. More than half the 409 companies surveyed now also use shortlists, and many employ headhunters.

Fees are rising, reflecting the greater involvement and responsibilities of NEDs. The average fee for a NED who devotes 11 to 20 days each year to a large company with turnover of more than #2bn is #27,800. In comparison, those in small companies (turnover less than #25m) can expect to receive #13,300 per year.

Despite these improvements, Cadbury’s original goals are not yet complete.

Sir Adrian is urging company chairmen to be more imaginative in their selections, including using overseas professionals. The English ICA is also keen to see a more diverse selection, but was pleased to find companies are improving.

Roger Davis, a member of the institute’s corporate governance group, said the report showed a steady and progressive move towards improved corporate governance. Following several spectacular corporate failures in the early 1990s, a real change has become evident in NEDs selection, he said.

‘But the greatest test will come if we are going to go through a rocky economy. We will see if those companies that most needed to learn the lessons have done so,’ he said.

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