Author: Julie Garland McLellan

The British Financial Reporting Council has just released an updated version of the corporate governance code. The new Code recommends “in the interests of greater accountability”, that all directors of FTSE 350 companies shoulder-elected by the shareholders each year at the AGM.

As with all other provisions of the Code, companies are free to explain rather than comply if they believe that their existing arrangements ensure board effectiveness, or that they need a transitional period before they introduce annual re-election.

This provision sits uneasily alongside the provision that requires directors to be appointed for a specified term and for there to be an especially rigorous explanation of any term beyond six years. It is obviously not intended that, as in some not-for-profit boards, the board is to be substantially changed each year. It is also at odds with the provision that states (and we should all agree) that the nomination committee nomination committee should evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.

It is very difficult in a fast moving commercial environment to find people with the specified skills and experience that also have a vacant slot in their portfolio of board seats at the time when you need to fill your board vacancy. Having found such a person it is a relief when the shareholders ratify the appointment at the next AGM. Although it is rare for shareholders to overturn the recommendation of the board there is always the chance that this may be one of those rare occasions. Boards work (or should work) at the strategic level and they need time to impact the company culture and implement strategic changes. To attempt to provide this high level input in a short time-frame (and one year is perilously short) and have noticeable results to ensure being voted in again at the next AGM is an impossible task. At worst it will lead to a rash of short term initiatives that could weaken the company in the long term (such as cutting back on training and R&D) and at best it will lead to more time at AGMs being wasted with matters of form rather than issues of substance.

The boards of smaller companies are also encouraged to consider their policy on director re-election. Presumably with the idea that they too might benefit from a complete loss of corporate knowledge or an unbalancing of the carefully built skills set available on their boards.

This recommendation is a disaster. It shows that the code-writers have no respect for the value of a skilled board team that acts on strategic long-term issues. Let’s all hope that the FTSE 350 companies opt to explain rather than comply.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

One of the most vexed issues when talking to people who aspire to company directorship is the simple question, ‘What does it take to be a director?’

There are few satisfactory responses. There are courses (some of which are very good and comprehensive) but none of these are accepted as proof that an aspiring director has any real potential. There are proponents of appointing ‘eminent persons’ such as successful politicians, business-people or academics in the hope that the good judgement they developed in reaching their positions of eminence will be the sort of judgement that will also serve a board. In the not-for-profit boardroom the ability to make substantial donations is often considered to be sufficient qualification for the role. But none of these criteria really touch the core of the problem; how to identify good director talent before the aspiring director has already built a board career.

This confusion over the suitable ‘entry level qualification’ for boards is exacerbated by the team-based nature of the role. In consulting to boards it becomes quickly apparent that many board problems are actually simple interpersonal or team dynamic issues that are played out at the highest (and most dangerous) level in the organisation. How can board recruiters measure the ability of an aspiring director to make a valuable contribution to the team, without losing their independence of thought?

Every board is unique and individuals who perform well on one board may fail spectacularly on another. Taking on a new board role is a nerve wracking experience for both the recruit and the recruiters. There are never any guarantees of success. At the present time we are witnessing a world in which previously well respected, widely experienced, board directors have been found lacking in judgement and have presided over corporate failures that, with the benefit of hindsight, make it obvious they never should have been given that responsibility.

Regulatory standards are of little help. All around the world there are ‘lowest common denominator’ standards that helpfully inform us that directors should be over the legal age of adulthood, out of jail, not currently banned from directing and, in some (but not all) jurisdictions, not certified as insane. These are easily measured criteria but they are also clearly not sufficient qualification for a role in which lives, as well as life’s savings may be at stake.

The work of academics studying the board provides some useful indications. There is no overwhelming statistical proof that structural board arrangements such as audit committees, balance of executive and non-executive, or of independent and non independent directors, etc. have any impact on the likely performance of the company. There have been suggestions that the slight correlations are proof that companies that are performing well can afford to fill their board with enough independent NEDs to staff the relevant committees and provide the desired ‘balance’. Companies that have performed badly often go through a process of having very engaged ‘executive-style’ boards as they right the problems and get corporate performance back on track.

The academics are generally agreed that a board that operates as a team, with effective conflict resolution and rigorous debate in an atmosphere of trust and mutual respect, has a better chance of driving better performance than a board that is dysfunctional and unable to reach agreement on the key issues. But the thorny problem remains; there is little way to tell which individuals will enhance the board’s dynamics before the appointment.

The use of skills matrices to ensure that the board has members who can adequately understand the issues expected to be raised as the company progresses in implementing its strategy does assist in some respects. However, the fact remains that there are still some glaring inconsistencies. Most companies need people to implement their strategies and yet very few boards have anyone with a human resources background among their members. The number of IT and marketing specialists on boards is also generally very low. Legal and financial skills are generally better represented than the softer skills. There is no doubt that understanding the law and finances is a necessary skill for every director; but is it really necessary for companies to have such a preponderance of highly qualified professionals from these two disciplines at the cost of a more balanced array of skills?

The current debate on diversity would appear to suggest that the more diverse the board the better the expected corporate performance. There is not yet any great evidence for this, especially when gender is the basis for the conversation. Perhaps looking at other types of diversity, such as skills based diversity, would give a more informed understanding of what a board really needs. Then, working back from the needs of a board, we might be able to establish a baseline for the minimum criteria a director must satisfy to be considered fit to take on the role.

For directorship to become professional, we need professional standards for directors. If only we could agree on what those standards were ….

What do you think?