The Debate: Developing higher standards.

Developing higher standards

By Dr Daniel Summerfield

Independent directors have a vital role to perform on the board and an important contribution to make to the running of companies. The growing expectations placed on them have created a need to address several areas of concern in order to maximise their effectiveness.

The IoD welcomes the Higgs inquiry into the role and effectiveness of non-executive directors as we believe recruiting the right independent directors and enabling them to do their job effectively is the key to good governance. Although corporate governance standards have improved recently there is still room for more improvement.

One concern is that independent directors can over-commit themselves by sitting on too many boards. In certain circumstances an independent director may be required to devote more attention to a particular company which may prove difficult if he or she is over-stretched.

Secondly, it has also been suggested the current level of remuneration for non-executive directors is not commensurate with their role. If the pool is to be increased with more effective independent directors, this issue will need to be explored thoroughly in the Higgs inquiry.

Thirdly, there is a view that the recruitment process for independent directors needs to be assessed to ensure that it is undertaken objectively and thoroughly. Some commentators have suggested the net needs to be cast more widely to include other potential pools of independent director recruits.

Finally, more needs to be done to ensure that independent directors are aware of their role and responsibilities. As these responsibilities grow and become more complex, there is an increasing pressure on all directors to develop their professional standards and to undergo training.

For these reasons, the IoD and Ernst & Young have set-up the independent director initiative, a long-term joint venture to support and promote the role of independent directors.

The IoD is a strong advocate of the UK’s unitary board structure and aims to develop and disseminate high standards and new thinking in corporate governance, boardroom practice and director professionalism. With recent corporate crises, such as Enron, the need to address the role and improve the effectiveness of independent directors becomes ever more apparent.

• Dr Daniel Summerfield is the corporate governance executive of the Institute of Directors.

It’s time for a radical rethinkBy Peter Williams

There is no dearth of good potential candidates willing and able to act as non-executive directors, as the Institute of Directors claims.

But there is a dearth of imagination in sourcing the talent that exists and is under used by UK businesses.

While the role of the non-executive director has been re-examined several times in the last decade, the background and profile of the non-executive remains substantially unaltered.

A quick flick through the annual reports of too many companies will confirm that the non- executives are probably drawn from a narrow background.

Quoted companies should be casting their net wider to obtain future non-executives from additional walks of life. Boards should think about finding some non-executives from senior people in the public and not-for-profit sectors, from business schools and other parts of academia, from those who work in and with the good non-quoted companies, as well as the rising stars in other companies who have yet to reach the main board.

Many experienced partners in firms of chartered accountant would make excellent non-executives of quoted companies.They have a vast wealth of experience of seeing at close quarters what make companies tick and in recognising the early warning signs of trouble ahead. And they are trained in accounting and have to comply with professional ethics, so are natural candidates for the audit committee.

A longer list of candidates from diverse backgrounds would fit in with a trend noted by the IoD that ‘good’ non-executives are cutting down the numbers of boards on which they serve.

Minds are now rightly being concentrated on the amount of time an individual is able to devote to each company and on their independence. One of the basics of independence must be that, without the dependence on remuneration from the company, you are more likely to ask awkward questions if you can walk away, reputation intact.

The day of the ‘Lord on the Board’ for appearances’ sake appears to be over, but there is still a substantial element of the old-boy network.

Boards who look further than the boardrooms of fellow-listed companies could be pleasantly surprised.

• Peter Williams is a freelance journalist.