Strategy & Operations » Governance » Corporate Governance – Striking postures

Corporate Governance - Striking postures

For directors to be truly independent, they need to move beyond an awkward squad mentality if they want to benefit their businesses.

Independence, corporate governance specialists often say, is a state of mind.
A better definition would be very useful. Increasingly, independent directors on
a corporate board assume that adopting an awkward stance means their job is done
and their independence preserved. But there is more to it than that.

Recently, Independent Audit, a corporate governance consultancy, issued a
survey of FTSE-100 annual reports for the first year in which they had to comply
with the combined code on corporate governance, which meant reporting on the
independence of directors. The survey found that 90% of non-executives were
described as independent. Most companies made an effort to describe how they
were independent, but 14% simply asserted they were and left it at that.
Jonathan Hayward, chief executive of Independent Audit, described it as a new
version of the Higgs code recommendation of “comply or explain”.

Another 4% simply ignored the topic completely.

The independence argument is in danger of vanishing down a cul-de-sac. One
expert blames all those post- Enron pundits who overemphasised the idea that
independence simply meant asking “the tough questions”.

Given the lack of in-depth knowledge of the companies concerned and the lack
of solid accounting expertise among non-executive directors, how would they know
what the answers to “the tough questions” really signified? The survey pointed
to Barclays as a good example of an organisation making an effort. Its report
includes a list of behaviours it thinks are essential for independent directors.
And it makes those qualities part of the directors’ performance assessments. But
other companies, such as WPP, simply described the code’s ideas on independence
as nonsense

“A popular diversionary tactic,” said Hayward, “is to refer to the director’s
knowledge and experience, which are excellent things for non-executives to have
but do not constitute evidence of independence of mind.”

This is a period of settling in and getting used to the combined code. The
independence of directors will be debated and the issue refined. Alastair Ross
Goobey, chairman of the International Corporate Governance Network, points out
the difficulties: “Is Michael Jackson, the chairman of PartyGaming, any less
independent because he got £1.5m to bring it to market?”

Unfortunately, independence will all come down to perceptions. Pundits will
value independence where they see a fistfight erupt at board-level, seeing it as
tangible evidence that the independent directors are getting stuck in. But as
good corporate governance it should be deemed a failure. Much better that
independence of mind holds sway behind closed doors so that the company can
subtly alter strategies and increase shareholder value as a result.

There are strong parallels with the audit world here.

Over the years auditors have been presumed weak if not seen to be
belligerently resigning the job. But anecdotally we all know of issues that were
sorted out in a tough manner but quietly, which serves companies, their
investors, and external auditors better. But that doesn’t play well with
pundits, who prefer something out in the public arena they can comment on.

This is where the surge of corporate governance measures may falter. The old
argument that they would get in the way of old-style buccaneering and bullying
behaviour was easily seen off. A mention of Robert Maxwell and all would go
quiet. But it is going to be harder during a period where, by and large,
corporate scandals have been scarcer.

The idea that corporate governance somehow curbs entrepreneurial spirit will
gain more supporters. At the moment the sort of Morrisons supermarkets talk that
a check-out girl would be as useful on the board as an independent non-executive
director is rightly scorned.

This sort of activity is still seen as on the fringe of serious corporate
behaviour, but it would only need a few more daft corporate governance outcomes
for it to get up a new head of steam.

The answer lies in strengthening audit committees still further and then
telling investors more about the process.

As the Independent Audit survey puts it: “Audit committee reports give away
more than their authors might intend, and far too many of them portray

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