The non-executive role on subsidiary boards
NEDonBoard submitted to the FRC it’s response to the consultation on the UK Revised Corporate Governance Code. NEDonBoard thanks its members and audience for their contribution, in particular, Elise Perraud, Nicky Heathcote and Laura Marianello.
In December 2017, the Financial Reporting Council (FRC) published proposals for the latest revisions to the UK Corporate Governance Code (Code), which are due to be published by this summer. The revised Code will be effective in January 2019.
The aim of undertaking a comprehensive review is to make sure that the Code “remains fit for purpose and continues to promote improvement in the quality of governance”. The proposed revisions to the Code place particular emphasis on: director independence; stakeholder engagement; executive remuneration; diversity; corporate culture; shareholder engagement; smaller company exemptions.
NEDonBoard coordinated a response on behalf of its members and community, with the intention of submitting it by the above-mentioned deadline. Our view is that the FRC has achieved its objectives of having a clearer, shorter and sharper Code.
The strengths of the Revised Code
- “Comply or explain” approach. Retaining this approach for the Code’s Provisions provides flexibility in the application of the Revised Code while providing transparency over corporate governance decisions, which deviate from best practices.
- Corporate culture. The board should define the purpose, strategy and values of the company and consider which behaviours it would like to promote to achieve its strategy.
- Removal of smaller company exemptions. Companies below the FTSE350 should strive to achieve the highest standards of corporate governance. NEDonBoard believes that higher transparency and more extensive reporting will lead to more diverse boards.
- Greater engagement of the board with the workforce. The term workforce is widely defined and not only include employees but contractors, workers and agency-workers. The board of directors has responsibility for considering the needs and the views of a wide range of stakeholders, including the workforce. The Revised Code proposes three options (through a director appointed from the workforce, a formal workforce advisory council or a designated non-executive director) but leaves it open for companies to select the most appropriate method.
- Widening of whistleblowing. Whistleblowing is more widely defined and extends beyond financial issues. The Revised Code envisages that the board will be ultimately responsible for overseeing and reviewing the company whistleblowing arrangements.
- Greater engagement of the board with the shareholders. “Significant” votes against any resolution require action and the company should engage with the shareholders to understand the reasons behind the vote. “Significant” is defined as 20% of the votes. An update should be published within 6 months of the vote with a final summary included in the annual report.
- Greater responsibility of remuneration committees. With the Chair now requiring at least 12 months previous experience, the remuneration committee will take responsibility for overseeing company remuneration and wider workforce policies as those are supportive of long-term success and sustainability of companies.
- Diversity and inclusion. Disclosures related to gender balance are extended to smaller companies. Nomination committees have a responsibility to oversee the development of a diverse pipeline and promote diversity in the appointment and succession plans for board members and senior executives.
Further improvements to be considered
- Independence and service. The nine-year period has been retained in the Revised Code for a non-executive director to be considered independent. NEDonBoard recommends a shorter period.
- Maximum tenure. Both the Code and Revised Code do not refer to a maximum period of tenure, although the nine-year criterion mentioned above for independence has been used in practice as an indication of maximum tenure. NEDonBoard advocates for a shorter period to be consistent with Principle I of the Code, which sets out: “Board membership should be regularly refreshed”. A shorter tenure would better reflect the fast-evolving environments in which today’s businesses operate, the shorter duration of employees’ years of services (including at C-suite level) and the need for refreshed boards through access to the boardroom by a younger generation of leaders. NEDonBoard acknowledges the benefits of continuity and the time required for newly appointed non-executives to get the suitable level of experience to be effective in the boardroom. With those considerations in mind, NEDonBoard supports a maximum period of tenure of seven years.
- Diversity and inclusion. The Revised Code defines diversity through the lens of “gender, social and ethnic backgrounds, cognitive and personal strengths”. NEDonBoard considers that a generational dimension (i.e. average age of board members) should be added. In addition, we recommend the Revised Code to go further in the reporting of diversity by incorporating all dimensions of diversity, and not only gender balance.
Written by Elise Perraud
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Related posts
There are several problems in Corporate Governance in the UK.
1) Lack of diversity. Even those boards which claim diversity are nothing of the sort. They are all composed of men and women (whether of different ethnic backgrounds or not) who are absolutely identical. They all come from the same universities, the same schools and the same previous employment. They all think the same, and the results show it.
2) Remuneration committees. It seems that everyone is sitting on each others committees and so we get an unsustainable spiralling of executive pay under the nonsense of “need to pay to attract the best”- You don’t!
3) Portfolio of directorships. This is probably the most cynical and dangerous. People tend to try and accumulate a portfolio of NED roles. The effect of this is to close the door on diversity and reduce the pool of NED’s which in turn results in the problems of lack of diversity and unmerited pay levels.
Perhaps what is required now is for a restriction on the number of NED roles that an individual can hold. Personally I think this should be one (Where it is a quoted company), and the length of tenure should be no more than 7 years.
Finally, perhaps we need to have clauses that prohibit NED’s and, for that matter Executive directors benefiting from a quoted company sale or takeover, so that there is no possible conflict of interest for directors executing their fiduciary duty to the shareholders.