Fixing the corporate governance problem is a national necessity

 
Judith MacKenzie
Inside Liverpool's Famous Liver Building
The old boy network that once served the business world is no longer fit for purpose (Source: Getty)

Corporate governance in the UK is in need of urgent reform.

That’s the view from both the left and the right, with TUC head Frances O’Grady and City fund manager Helena Morrissey sharing a column in The Times this week to lambast the Tories for dropping corporate governance reforms from its agenda.

If Britain is to remain competitive amid uncertainty, we must take a serious look at how companies are run.

Read more: Box-ticking approach to governance is failing companies, says new survey

The old boy network that once served the business world is no longer fit for purpose. It’s a long time since tapping up a golfing pal for a part-time board position was an option for leadership teams looking to strengthen their business and preserve its reputation.

For quoted companies committed to good corporate governance, identifying talent for non-executive positions is crucial. Common sense tells us this – so do lawyers, regulators, many reports and common principles of fairness and practice.

Big-company appointments that end badly may attract the worst sort of headlines, but don’t imagine it’s any different at the other end – smaller companies just tend to operate below the radar.

Head-hunters Norman Broadbent researched the market and concluded that some 50 per cent of all senior executive new-hires fail within 18 months. The reason? Poor process, lack of due diligence, hiring based on intuition rather than data-based decision making, and too little scientific assessment. Were a company to have such a high failure rate elsewhere in its business, you’d think it would do something to fix it, and quickly. Yet surprisingly few companies address this issue.

In fact, many growth companies still turn to their internal or adviser networks in recruiting non-executives. Time is a factor; few small and mid-size companies can afford top-level headhunters, and great candidates don’t read small ads.

Yet the function of non-execs has never been so important in growing businesses. The best bring experience, wisdom and strategic perspective. They sense-check big decisions, help avoid major mistakes, stand up for investors and provide counsel for the executive board.

It is no coincidence that the best companies tend to have the best chairs, but the range in quality is vast. Some board chairs are “just appalling, a waste of space”, failing to challenge management by asking difficult questions, according to a respondent in the March 2017 QCA/RSM Small and Mid-Cap Investors Survey of asset managers by YouGov.

Non-execs need to be independent for a number of reasons – to stand up to overbearing management, balance competing interests, and provide oversight without getting involved in the detail.

Increasingly, a key measure of board effectiveness is diversity. Small and mid-cap quoted companies are trying to build more diverse boards. Of the 61 companies that recruited for a board position, 36 per cent specifically sought out female candidates from the long list, according to the QCA/BDO Pulse Small and Mid-Cap Sentiment Index by YouGov, summer 2015.

Diverse boards ensure a broad set of skills is represented, arming companies to better tackle challenges. They enable healthy debate and discourage “group-think” – a factor blamed for failures in the 2008 financial crisis.

That’s why, in partnership with its member The Norman Broadbent Group, the Quoted Companies Alliance is helping companies anticipate and resolve people challenges.

According to the House of Commons Business, Energy and Industrial Strategy Committee on Corporate Governance, effective engagement by investors with company management “allows shareholders to better judge the effectiveness of board members, to understand their long term strategy and to assess whether they are fulfilling their duties to all stakeholders, as required by law”. However, it was noted that in many cases the press did a better job of applying pressure to companies than shareholders.

Good corporate governance is more important than ever as the UK approaches an uncertain future. Companies with a strong board, with truly independent directors who can balance multiple interests while contributing to wealth creation, will be a highly valuable factor in the success of British companies.

The Quoted Companies Alliance is an independent membership organisation that champions the interests of small to mid-size quoted companies. In partnership with QCA member The Norman Broadbent Group Plc, the QCA is helping companies anticipate and resolve people challenges.

Read more: The four questions Carillion's board must answer to survive

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