International Process and Performance Institute

We live in what could be termed the age of corporate governance. Corporate governance codes of practice and consultants abound. There must be at least one expert on corporate governance for every Fortune 500 company.

Yet before any of us had heard of the term “corporate governance” directors who were modestly paid by today’s standards managed to build profitable companies with a global reach. As a researcher at the Institute of Directors I interviewed thoughtful and competent directors. When I undertook my early surveys I encountered effective boards.

Over the last couple of years in this age of corporate governance we have experienced a catastrophic failure of governance in the banking sector. The World Council for Corporate Governance is needed today as never before. There is much for this International Corporate Governance Conference to do.

The theme of this panel discussion is STARR – the selection, training, appraisal, remuneration and retirement of directors. I would like to focus on selection. Recent events have called into question the value added by many boards, particularly those of financial institutions that have been bailed out or whose assets have been written down.

The banks rescued by Governments are not obscure companies run by inexperienced directors. They include household names, whose board members have included the ‘great and the good’ of the City establishment.

Despite their directorial pedigrees, clear duties and responsibilities and regular attendances at meetings, many directors seem to have neither noticed nor questioned dangerous practices. Executive directors have not been held to account. Boards have presided over bank cultures and practices that suggest a short-term focus, self-interest and greed among those for whom they have been responsible.

Is there an alternative to ‘safe directors’ who ‘look the part’ with their smart suits and ‘track records’ of service on plc boards, and who can be relied upon not to question, challenge or probe? We need to look beyond the ‘normal suspects’ for people of integrity who would be willing to ask difficult questions and who would welcome an opportunity to ‘make a contribution.’

Given the evident deficiencies of the current narrow gene pool from which directors are selected and the lack of value some of them appear to add it ought to be possible to do better. A new generation of directors are required, selected from people of integrity who have their feet on the ground, are alert to risks and the reality of what is happening around them, and who think for themselves. Where should we look?

Charities have a big impact on the lives of many people. The work of some medical charities affects the quality of life of millions of people with specific conditions. Yet those who serve as charity trustees are often unpaid. They have significant legal duties. They attend and contribute to board meetings, and discharge their responsibilities without any hope of personal financial gain. Their motivation derives from the vision, purpose and work of the organisation and their reward comes from the satisfaction of contributing to its success.

The major professions, many of which are self regulating, can also have a significant impact upon the lives of most citizens. Despite their responsibilities and what is at stake, committee and council members generally give their time for free. Like charity trustees, all they normally draw is out of pocket expenses, such as the cost of travel to committee meetings. Why do they do this? They are there because they want to make a difference.

Many directors of large corporations like to stress the complexities of the issues they face. Yet, understanding that economic bubbles bust, or that people may default on their mortgage statements in a recession, seems to have been too complex for some boards.

Some areas of the public sector such as the NHS are inherently complex.  A large Primary Care Trust (PCT) can spend over £1 billion locally on health care. The one that I sit on as Chair of the Audit and Governance Committee is also responsible for social care. There are various committee and sub-committee meetings to attend. There is the added challenge of holding executives to account when main meetings are held in public. Many members devote much time to preparing for meetings and often engage in rigorous questioning that would be unusual in some private company boardrooms.

In any sector some directors and boards will be more effective than others. However, there is much that private sector boards can learn from the voluntary, public and professional sectors. Directors do not need to be mercenaries whose first thought may be to arrange alibis and disclaimers and maximise their remuneration. It is possible to find people of integrity with directorial qualities and experience outside of the relatively narrow ranks of the City establishment and those who already have plc director experience.

Outside of the rarefied atmosphere of plc boardrooms, and in other walks of life, motivated citizens are giving considerable time, much of it unremunerated, to service upon boards that have a significant impact upon their fellow citizens. Many of them are displaying directorial qualities that would put some high profile directors of large corporations to shame. Few of them fit the caricature of the ‘nodding donkey’ or the ‘cardboard cut out’.

Directors in these other arenas are very committed and highly motivated to provide effective governance. Within the parallel dimensions in which they operate – whether charities, the professions or the public sector – significant effort may be devoted to ensuring directorial knowledge and skills are kept up to date. Nomination committees should broaden their investigations to embrace candidates from the voluntary, public and professional sectors.

I do not expect sudden or large scale change. Directors have onerous duties and responsibilities. Because of what is at stake selectors need to exercise a degree of caution. A core boardroom team of competent and experienced directors with more conventional backgrounds may first need to be put in place before existing directors feel confident enough to consider additional appointments from beyond the traditional gene pool that might bring greater diversity and fresh thinking into the boardroom.

Widening the gene pool will not be easy. There are people with directorial qualities and potential out there. To use a quotation: - “Seek and ye shall find”.