Improving corporate governance in the UK is now much more a question of people and attitudes than new regulation. We do not believe that the UK model of corporate governance is broken: we do not know of a better model elsewhere in the world.
Codes of best practice and an atmosphere of general comment and interest from the community at large, without obsession, remain the way forward. Good people are required to make any system work well, and can greatly improve the working of bad systems. The wrong people can cause major difficulties within the best of structures.
We suggest ways in which numbers of good, independent, non-executives can be increased.
Non-executive directors’ main roles are those of strategic support and monitoring of management – executive directors – in a unitary board. Their independence from important potential conflicts of interest which can affect executive directors is fundamental. We set out many examples of such conflict of interest. What is required to be independent will evolve over the years. We suggest some ways of refining of the concept which would be helpful now.
We suggest attitudes and practices which would improve the effectiveness of company chairmen, who should be numbered among the independent nonexecutive directors. The latter need to be in sufficient numbers (a simple majority of the board) and to have the firmness of purpose to require suitable information flows from executive management. They must give the time to understand, and bring an ability to use, the information provided. Companies need to invest in supporting and developing the abilities of their non-executive
directors if they are to get the best out of them.
We highlight one key area in which most non-executives need education if they are to be effective. The number of non-executive posts a person can hold is very limited. Persons in
full-time work probably cannot take on more than one non-executive directorship – and that only with the cooperation of their employers/firms.
Non-executives need adequate reward for their time and skills but moderation in total reward and avoidance of some forms of remuneration are required if they are to be truly independent. For this reason, the potential financial liabilities which they incur from their position must be limited – if they have acted in good faith, with reasonable diligence, and not recklessly. It is neither practical nor desirable to protect them from the reputational risk of involvement with a company. We highlight some problems with the proposed code of directors’ duties included in the recent draft Companies Bill, although in principle such a code can be a useful tool.
No group of non-executives, however independent, skilled or diligent, is able to protect against a management which is resolved to conceal or mislead.