While UK boards are increasingly adapting best practices in corporate governance, there are still areas where considerable improvement is needed. Boardroom diversity, for example, is increasing, but age range is not improving on most UK boards – members all tend to be over 60. Here are best practices that UK boards should adopt.
UK shows increased best practice corporate governance adoption
The 2017 survey of UK boards by specialist consultancy Spencer Stuart in London showed a marked improvement in the adoption of best practice governance. The increased attention to corporate governance in the UK is undoubtedly, and at least partly, the result of investor pressure.
“The Spencer Stuart review shows an influx of women and so-called ‘next generation directors’ into UK boardrooms, bringing much-needed skills with them. This year we report that 34 per cent of all newly appointed non-executives are serving in that role on a quoted board for the first time (the highest on record). Foreign directors have risen from 24.5 per cent to 32.7 per cent and the average retainer for non-executives has grown 41 per cent.”
All of these changes go to best practices in UK corporate governance. With the publication of the new version of the Corporate Governance Code by the Financial Reporting Council on Dec. 5, 201 7, UK companies will be expected to pay greater attention to these fundamentals, the UK Institute of Directors points out.
9 Best practices in corporate governance:
1. There should be a separate CEO and chairman.
This separation keeps board leadership independent of management. The separation of the chairman and CEO positions is a key component of board independence, says the Institute of Directors, because of the fundamental differences and potential conflicts between these roles. The CEO runs the company — the argument goes — and the chairman runs the board, one of whose responsibilities it is to monitor the CEO. If the chairman and the CEO are one and the same, it is hard for the board to criticise the CEO or to express independent opinions. A separate chairman, responsible for setting the board’s agenda, is more likely to probe and encourage debate at board meetings. Separating the two roles is, therefore, essentially a check on the CEO’s power.
2. The chairman should be independent.
The independence of the chairman is paramount to the successful implementation of good corporate governance practices at board level, Deloitte explains in a recent report. To ensure that the chairman acts in an independent manner, internationally recognised governance codes state that the chairman should not have previously been the CEO of the company.
3. Importance of non-executive directors on the board.
Non-executive directors are usually chosen because they have a breadth of experience, are of an appropriate calibre and have particular personal qualities, a report from the Institute of Directors notes. Additionally, they may have some specialist knowledge that will provide the board with valuable insights or, perhaps, key contacts in related industries or the City. Of the utmost importance is their independence of the company management and any of its ‘interested parties’. This means they can bring a degree of objectivity to the board’s deliberations, and play a valuable role in monitoring executive management.
4. Percentage of female directors on the board.
Female directors have a significant impact on board inputs and firm outcomes, according to a study by the professors at the London School of Economics. These results suggest that gender-diverse boards allocate more effort to achievement
5. Increase the percentage of non-British directors on the board.
Nationality diversity leads to improved board decision-making due to more diverse perspectives, according to the Spencer Stuart report. There is also an input of skills and know-how that comes from recruiting foreign board members
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6. There should not be fewer than eight or more than 15 directors.
A report by Dorger Consulting notes that boards today function best as small but manageable groups for effective decision-making. Too small a group, and there is not enough diversity of opinion. Too large a group, and reaching a decision becomes problematic.
7. Board of directors’ age range – diversity of age is also a best practice.
A report by consultancy Russell Reynolds shows that diversity of age on a board is critical for a variety of perspectives. It balances the insight and experience that comes from older board members with longer tenure with the new ideas introduced by younger and perhaps less-experienced directors.
8. Number of board meetings held.
Holding a reasonably high number of board meetings shows a higher level of board diligence and commitment, according to a University of London study. Obviously, too many meetings will not be productive, but too few slow down on accomplishments. Boards must find the right pace.
9. There should not be a too large percentage of directors on the board longer than nine years.
As the Spencer Stuart report notes, high values could indicate lack of board independence and/or the entrenchment of long-serving directors. There is a noted lack of productivity when board members remain on the board for too many years. The board member may simply begin to treat the post as a sinecure.
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