The Association of Corporate Treasurers (ACT) makes an uncompromising response to the Higgs consultation document on non-executive directors.
From their excellent vantage point as custodians of the financial risk management process, treasurers, responding through the ACT as their professional body, advocate a rigorous approach to the issues around the independence of non-executives:
Within the unitary board, the position of the independent non-executive is vital and there should be a more rigid definition of ‘independent director’; the Chairman should be an independent non-executive director, as should the majority of the board; and the exception in the Combined Code, which permits the roles of Chairman and Chief Executive to be held by one individual, should be abolished. ACT
The ACT supports the concept of independence used in the Combined Code, that non-executive directors “be free from any business or other relationship which could materially interfere with the exercise of their independent judgement”, but go further in requiring that they be “independent of management”. Individuals associated with suppliers, such as financial institutions, should not be regarded as independent - a point which has not been accepted sufficiently widely.
It is also essential that non-executive directors have a greater understanding of the assessment and management of financial risk - an area where most directors have the least experience but are expected to contribute the most.
Other recommendations made by the ACT include:
Richard Raeburn, Chief Executive of the ACT, said:
Improving corporate governance in the UK is now much more a question of people and experience than new regulation. We do not believe that the UK model of corporate governance is broken and codes of best practice remain the way forward. True independence is vital, for the Chairman and the majority of the Board. Non-executives need adequate reward for their time and skills but moderation is required if they are to be able to remain truly independent. The evidence from major corporate disasters shows that no group of non-executives, however independent, skilled or diligent, is able to protect against a management which is resolved to conceal or mislead. They should, however, have the experience or training to identify and analyse potential risks. The understanding of risk held by those that have had experience in treasury management within the finance function should be seen as a key element in the experience profile established for non-executive directors. Richard Raeburn, Chief Executive of the ACT
Should editors wish to commission an article from the ACT on its response to the Higgs consultation document on non-executive directors, please visit the ACT Press Room.
These practical suggestions from the ACT are based on the views of its members. In an executive capacity, treasurers typically work closely with their company Board, acting as the custodians of the risk management process; in a non-executive capacity they work, along with the rest of the Board, to set the risk management framework.
For further reference see: “Non-executive Directors - a risky business” published by the ACT: authors Rupert Beaumont, Christopher Duffett and Gerald Leahy.