UK – A new set of proposals aimed at reforming the role of non-executive directors in UK companies has been broadly welcomed by the industry, though some say institutional shareholders will have to do their bit as well.
The proposals, released today by former investment banker Derek Higgs, seek to clarify the role non-executive directors play in British boardrooms and promote “vigour and transparency” in their appointment. Higgs also envisages a closer relationship between non-executives and shareholders (see separate story for the full proposals).
“I do not presume that a one-size fits all approach to governance is appropriate,” Higgs says. “The review is not a blue-print for box-tickers, but a counsel of best practice that can be intelligently applied.”
He called the report “a determined and realistic agenda for change, building on the existing framework of UK corporate governance”.
Responding to the proposals, National Association of Pension Funds chief executive Christine Farnish said: “The Higgs reforms are a significant boost to corporate governance in the UK. Whilst standards in this country are among the highest in the world, there is no room for complacency, and Derek Higgs’s report includes much that will enhance boardroom practices.”
Higgs has rejected a legislative approach, saying: “Effective boards depend on the best people and on their behaviours and relationships. My recommendations reflect this. My hope is that, taken together, the recommendations of this review will significantly raise the bar for board practice and corporate performance in the UK.”
The government, which commissioned the report, welcomed its findings. “Stronger and more effective boards are essential to continue to raise standards of corporate governance in the UK,” said Chancellor of the Exchequer Gordon Brown.
Trade secretary Patricia Hewitt added: “I welcome the practical steps Derek Higgs proposes to widen the pool of people available to UK boards.”
Institutional shareholders will have to play their role too. The Institute of Directors’ director general George Cox said: “We particularly welcome the fact that Derek Higgs has recognised that it is the role of shareholders to monitor the operation of the boards of their companies, and the proposals give a much better framework for doing so.”
Cox added: “The basic need is to identify and spread best practice, with companies not being rigidly tied to observing every detail but being obliged to explain where and how they choose to deviate.”
“However, for this to operate as envisaged, shareholders - basically the large institutional investors - have to play their role intelligently. They have to take a genuine interest in the operation of the company, not simply follow a ‘tick in the box’ approach to compliance. For many, this will require a change of approach.”
Higgs has proposed a senior independent director to act alongside executives. "It makes sense for the senior independent director to participate in meetings of the chairman and management with leading shareholders so that the board can take investor views fully into account," said Peter Montagnon, head of investment affairs at the Association of British Insurers.
The IOD has “reservations” about the requirement of all companies to appoint a senior independent director. “This has the potential to be divisive,” it said.
The ABI’s Montagnon added: “This report contains a number of common sense proposals to help independent directors maximise their contribution by supporting sound strategic development and ensuring proper oversight of key issues such as audit, remuneration and the nomination.”
Stuart Bell, research director at Pension and Investment Research Consultants, or PIRC, said: “The proposals represent a bold and thorough agenda for change in UK boardrooms that should improve accountability, professionalism and effectiveness.
“However, we should not under-estimate the challenge that the new Code poses for current practices. Many boards will have to overhaul their composition and structure, their recruitment practices, their internal assessment processes and their approach to accountability. We will be fully monitoring the new requirements as soon as they are effective”.
Fund manager Hermes’ director of corporate governance Colin Melvin said: “The Higgs Report takes things a step forward in that it emphasises the behavioural aspects of good governance and, in turn, superior corporate performance.”
He added: “The spotlight that is currently on boards of directors is unlikely to be dimmed. Higgs provides practical and pragmatic guidance on how boards might enhance their effectiveness and performance and we are very pleased that the review shares our views on the significant contribution that non-executive directors can make to company strategy and governance.”