There is no single root cause of the current financial crisis and the extent
to which corporate governance was a contributing factor is not clear. For that
reason, the conclusions of the FRC’s recently announced review of the Combined
Code will be of great interest to many. Already we have been hearing the
familiar cry: ‘Where were the non-executive directors and the audit committee?’
It is all too easy to blame the audit committee or the non-executives when
things go wrong. What we have is an expectation gap.
It is 17 years since Sir Adrian Cadbury released his ground-breaking
corporate governance report and we are still struggling to understand what it is
reasonable to expect of ‘part-time’ directors operating with only a fraction of
the information available to their executive colleagues. It’s not that the
governance model is broken – we simply expect too much from non-executives who,
with the best will in the world, will never be able to prevent all governance
Furthermore, with each governance failure, non-execs come under more scrutiny
and governance pundits call for greater independence and a deeper knowledge of
both the business sector in which the company operates and the company itself.
We also hear calls for greater diversity in the pool from which non-execs are
selected. But surely these are all contradictory demands.
Independence – best described as the ability and willingness to challenge
executive management, even in apparently successful companies – is vital to the
non-exec role. But over-reliance on this attribute can lead to a board filled
with independent directors selected because they have no affiliation with, or
historical or current interest in the company’s business or its fate. That is an
odd group to help develop a strategy.
Similarly, non-execs selected because of extensive boardroom experience and
deep sector knowledge might be deemed insiders.
If there is a lesson to be learned it is this – we need to get back to basics
and accept the limitations of the governance model we have.
Companies need talented directors who can, at any time, take a holistic view
of the market they operate in and sensibly ask themselves ‘should we be doing
this and if so, are we fully aware of the risks?’
Pursuing a business strategy without understanding the risks involved is a
recipe for disaster.
Timothy Copnell is an associate partner of the audit
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