RegulationCorporate GovernanceThat’ll be the day

That'll be the day

Things have moved on a long way since the Lex column in the Financial Times said that non-executive directors on a board were rather like bidets in a bathroom

All agreed that they added tone, but there was less clarity about what they
were for.

The non-executive and its development, the independent director, is now a
standard part of a broad range of corporate governance elements that are in
place not only in the UK, but also in the rest of Europe.

This seems to be a good thing, but the question of purpose still remains. A
key job for the board is to make sure companies perform. But research among
chairmen of 145 leading companies in Europe shows that most of them think the
new governance regimes have done little to improve the underlying performance of
the businesses they are responsible for. In fact, Just 4% thought that the
changes had actually made a significant improvement in performance.
So, should we throw it all away and save the costs of running a board which is
code-compliant?

Only if we see board responsibility in a very narrow focus and one where
corporate performance is seen as its only objective. Boards have another key
responsibility to shareholders and to a wider range of audiences.

They need to make sure that a company is managed honestly, that its finances
are not expropriated by an untrammelled management and seek to ensure that the
sort of financial engineering, which ultimately brought the collapse of Enron
and the complete destruction of shareholder value is identified before it can
have such a disastrous impact.

Here the outlook is more encouraging. There is general agreement that the new
arrangements have forced less well managed businesses to bring their practices
up to scratch. And while it remains clear that, as ever, the determined crook
will work a way around whatever system is put in place, the checks and balances
built into the new regulatory environments make this a harder task and give
greater support to those whose job it is to practise eternal vigilance.

However, a real concern remains. One of the most frequently aired comments
was that regulation had made boards focus more on governance and less on
business issues. Our experience tells us that it is dealing with business
issues, helping develop business solutions and guiding corporate strategy, which
attracts people to boards. Unless this attraction remains we won’t find the
right people sitting on boards and that will affect performance in the long run.

Jeremy Rickman, MD, Russell Reynolds Associates

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