Date: 06/03/18 | Duration: 00:21:15
There’s not a week that goes by where the spotlight isn't being shone on corporate governance, from the collapse of Carillion to sexual harassment at work and the latest President’s Club scandal. In the wake of the 25-year anniversary of the Cadbury’s Corporate Governance Code the Financial Reporting Council (FRC) has launched a new consultation on the code.
In this episode we ask what’s gone wrong with corporate governance in the UK? How do we create a better system for the future? And what opportunities do we have now to encourage Board practice to be more progressive and ethical in nature – from a human capital governance model, to a new remuneration committee.
View the full podcast transcript
Mary Inman: So I think ideally corporate governance should set the tone from the top. In terms of what it’s supposed to achieve, being the visionary, I think it’s setting the moral tone and the moral compass.
Saker Nusseibeh: I think the current answer is that corporate governance is about ensuring that the company abides by the law, this is not the right objective, the objective should be about achieving holistic returns which incorporates not just short-term profitability.
Philippa Lamb: So the voices you heard there were Mary Inman and Saker Nusseibeh. She's a solicitor at Constantine Cannon, they are an American law firm specialising in whistle-blower cases and Saker is with Hermes Investment, one of our largest institutional asset managers. And with Barclays, Carillion and now Oxfam it’s no wonder that everyone is talking about how organisations should be governed.
Mary and Saker both took part in a round table in London recently where a mix of regulators, academics, business leaders and policymakers, they all came together to brainstorm ways to make corporate governance work better.
You'll hear a bit more from them in a moment, first though let’s meet two experts who've come along to the CIPD’s Wimbledon HQ to add their ideas to the mix – Stefan Stern is a long-standing friend of the CIPD podcast, he's director of the High Pay Centre and a former management columnist for the FT; Ed Houghton is senior research adviser Human Capital and Governance here at the CIPD.
So before we get into the detail on governance and what actually needs to be done about it shall we kick off with why so many influential people are calling for change?
Stefan Stern: I suppose it’s the build-up of scandals, crises, meltdowns, situations where apparently robust, successful businesses are signed off by accountants and investors are told everything’s fine and then suddenly they’re not fine, suddenly they're in terrible trouble or there’s scandal, there's very bad behaviour, which apparently people knew about for many years internally. So something is going wrong at the top of organisations, which is where this thing called governance is supposed to happen. The truth from the shop floor and through the organisation is not getting through to the board or is somehow being denied or shut out of the boardroom and that’s a very bit problem and people are rightly worried about it.
PL: And this isn’t fringe organisations is it, this is household names who should know better?
Ed Houghton: Well indeed I mean it’s another month, another corporate governance scandal. So these events seem to be fairly frequent and they seem to be large in magnitude and we have a corporate governance regime which is known globally, a leading regime, it’s a management system which is incredibly effective and yet we still see organisations failing in these ways and so well I would imagine the debates are going to be now is what is broken and what needs to be changed to improve the system to enable organisations to be productive and effective and also mitigate against these very significant risks to their reputations?
PL: Now obviously another big issue here is whistle-blowers. We’ve seen stories cropping up on that this month, we had the scandal last year at Barclays Bank where the CEO illegally tried to unmask a whistle-blower and obviously there is plenty to talk about there – we’ll get to it later if we have time. First though let’s hear a bit more from Mary and Saker about the Chatham House Conference and in this clip they’re talking about what they think is wrong with the way governance works now.
SN: This idea that companies are there just to generate profits and nothing else is a mistake. The idea that there is a separation between companies and society is a mistake. And the idea that somehow employees are a separate being from citizens, who are a separate being from business is a mistake. If you look at it in the round citizens own the companies that they work in and they own the companies that shape the society that they live in and therefore the discussion should be about what kind of society are we building with ultimately our own capital and our own company.
So when you look at things like employment policies for example and the gender diversity question which is now on everybody’s mind because of the BBC and others, the question is this, look we own these companies, do we want them to employ us whether we’re men or women, whether we’re of different colours of skin on whether we have different ethnicities, whether we have different orientations or not? That's the straight[forward] and which is the most efficient? And I think if we concentrate on holistic returns ultimately we find ourselves building sustainable businesses and because we build sustainable businesses they’re more resilient and because they’re more resilient and more sustainable in the long-term the financial return becomes even better.
MI: So I think part of the problem with corporate governance right now is that the directors are out of touch. I think part of it is just set up by the fact that they spend only a few days a month or a quarter, depending on what their situation is, that there's a disconnect between what’s going on in the C Suite and the Board with what’s actually going on down at the organisation.
PL: So what do you make of that point Mary’s just made about this disconnect between the C Suite and the rest of the organisation?
EH: I think in terms of non-executive directors tending to spend very little time out on the shop floor as it were, understanding the business…
PL: If any.
EH: …understanding the work of prospective…if any, there's a challenge in the induction of non-executive directors onto boards and the time that they spend through the induction process getting to understand the business and I think there's the incentive that needs to be put in place to enable non-executive directors to have that space to go out and understand the organisation and what that means is actually having the flexibility and the opportunity within their role to go and understand the organisation. But then also to use that independence, the independence that they have to be able to think about the organisation from a different perspective. That's the value they should add as a non-executive director. But speaking to some of our senior members we’ve found that actually their view is that non-executives are not remunerated enough for their role at present, actually non-executive directors don't have the incentive to go out and understand the business because they don't spend enough time and also the amount of money they get to do that is fairly low for the level of skills and expertise that they have. So there's a disconnect I think.
PL: That's interesting because it’s not often you hear about directors being underpaid but in the case of the non-execs you think they are. What do you think of that?
SS: Yes I mean I think more attention is being paid to this. Derek Higgs, as part of the combined code of governance reforms reported on non-executive directors, very strong on the point about independence, he was the person who suggested this idea that we should have more non-executives or independent directors in the board than executives, which has caused quite a change in boardrooms and I think the principle there was probably quite a good one. But this is a longstanding problem, Tiny Rowland, the industrialist, said that his non-executives were like baubles on a Christmas tree; and Michael Grade, even more colourfully, said that non-executives in business seem a bit like bidets in the bathroom, no-one was exactly sure what they were for but they added a touch of class. And we’re still wrestling with this problem what are they really there for and I think Ed’s got a good point if we really want a serious contribution from non-executives we’re going to have to probably pay them a bit more and ask for more hours and more effort from them.
PL: But should that be a thing that companies themselves are demanding or should that be a thing that regulation demands.
EH: Good point I mean I wonder if it’s a mix of two. I think being in this space with the corporate governance code refreshed, the Financial Reporting Council is undertaking at the moment there's an opportunity to ask these questions and to think more about actually how we structure some of these concepts around the roles and responsibilities of each of the members of the board. I also think there's a bit of pressure at the moment as well is to shrink the size of boards not grow them and so in terms of getting the right level of expertise in the room you have to be very expert if you’re going to have a smaller board to be able to have the impact that you need to have.
And so these pressures are weighing down on the corporate governance system I think which means that there's a challenge to try and evolve it to think about these things in a new way and other than trying to challenge the age-old debate of whether or not the right amount of time is spent by non-executive directors maybe there also needs to be a debate of actually what kind of skills and capabilities do these directors need to have to add value in modern organisations and that is something that I think the Financial Reporting Council will start to pick up more, hopefully in the responses that they get to the corporate governance consultant.
PL: So some questions for organisations about selection?
SS: Yes and this is where we have to use this word diversity don't we because we want different types of people in the boardroom, different types of voices, outlooks, backgrounds, not the Old Boys’ Club, not only one sort of social cadre, not people with one limited sort of background, perhaps only finance for example and not a cosy group of chums who all know each other already. Independence should mean this word challenge, it should mean good difficult questions that are hard to answer. There should be an element of abrasiveness without it becoming a fight but a boardroom that just keeps agreeing stuff in a cosy way, in perhaps a rather somnolent way, is going to lead to troubles in the organisation.
PL: Sure, so the echo chamber idea.
PL: Is there also an issue around people having clutches of non-exec directorships?
SS: Yes I think that's right. I think investors are waking up to this one too, the idea that you could have a huge portfolio of part-time roles and be equally and seriously committed to all of them is really not standing up to scrutiny anymore. Similarly chairing really it seems to me, more than one company seems like a big ask but certainly more than two would be too much for any human being I think.
PL: Yes and yet not unknown.
EH: Well indeed and I think there's debate about incentivising non-execs, asking them to take on less responsibilities and actually focus on delivering value in a smaller number of organisations, I think is probably a more effective way of getting the most out of a non-executive director.
PL: Okay well shall we move on to other thoughts about what needs to happen to improve governance, that's where we seem to have got to right now. Let’s hear a bit more from Mary and Saker
SN: So there is a place for government to change in this, however there's a change which is cultural as well in education. We have to effectively reintroduce the idea that working within the framework of a company brings with it responsibilities as well as privileges and that works all the way from the management down to the lowest worker within the structure because they’re all equal. And I think where HR can come into it is to help bring about a culture that highlights responsibility. In my own company, which is a financial company, we pay half our bonuses for people being nice, because nice thoughts encapsulates a lot of behaviours.
MI: I don't think, and this is ironic since I'm an attorney, I do not think more regulation is the answer. I think there's plenty of regulation, I think what government needs to do is the enforcement arms actually need to enforce. So for instance in the example of the current scandal at Barclays with Jes Staley, their CEO, seeking to unmask a whistle-blower, what the FCA very much needs to do here is to slap him on the wrist. Since the FCA has put into place whistle-blower champion programmes and has said that that is a priority coming out of the financial crisis that we want to have an avenue for people to bring to light problems sooner the FCA has to bring consequences to bear.
I think HR has a really important role to play in terms of being an avenue, a conduit and a support mechanism to allow the employees’ voices to be heard. I think the problem that exists now is that far too many employees see HR and the compliance arms as more compliant and not compliance, meaning they’re compliant with the status quo and with the things that are broken. In fact I think HR could be the original employee champion, and that's what they should be but instead I think they’re seen as placating the status quo.
PL: Okay well listening to that, it seems to me there's quite a lot of agreement round the table and with those two actually about where the problems lie so maybe it would be useful at this point to move on to how do we make it happen and obviously there's the role of HR within organisations and then there's external governance. Shall we start with HR because Mary is not impressed is she?
EH: No I think there's a real role for HR professionals to lead the way when it comes to championing employee voice to boards and ensuring that boards through their decision making consider the workforce and the impact of their decisions on the workforce and if we do believe in this idea of the culture of an organisation generating and creating value and creating the environment through which people can perform and succeed we have to be clear that there is one function in an organisation that will be able to help you understand your culture and that is HR.
PL: Do you think most boards are ready to hear that from their HR director.
EH: I don't think they are. I think many boards have a skills deficit when it comes to HR expertise. There's also a challenge when it comes to getting those skills to the board level, so most senior HR professionals getting to that ceiling where they don't then move into an executive director role sitting on the board. And there's also then the space for HR professionals to then move into non-exec roles in other organisations and there are not enough HR professionals wanting to take that step. And in our interviews most recently we’ve picked up on a really interesting theme that's around the subservience of HR to management and to executive to deliver data, deliver insights, but to not help make decisions.
PL: It’s understandable isn’t it they are employees so there is a difficulty there?
EH: Indeed and we think to lead you have to be able to challenge and be an effective HR person, you have to be able to stand up and make that case and it may mean that you are operating in a way which is challenging your most senior stakeholders in a business. But to be a good professional you have to do that.
PL: Agreed but that does rest on them being able to hear it? What do you think Stefan?
SS: Yes we’re talking about this thing called culture really which is difficult and hard to pin down as we’ve heard from some of the contributions. There is law in place, there's the Companies Act 2006, there's this thing called Section 172 which lists the duties of a director, which are very clear in fact and you don't comply or explain with the law you comply with the law and yet of course we don't see any legal action, as Mary was saying, we don't see enough cases being brought.
Culture is hard to pin down. Too many people from a finance background essentially in the boardroom and numbers are what public companies, in particular quoted companies, are all about, hitting targets, delivering returns to shareholders and unfortunately in this area of culture and people and HR this adjective ‘soft’ is used in contrast to the so-called ‘hard’ world of numbers, but actually as we all know, if we’re honest about it, even the toughest business leader in the world, the people stuff is actually what really matters, that's where the financial performance comes from in this world of intangible assets and knowledge and ideas and creativity and so we’ve got to find some other language I think to talk about the human contribution, the contribution of people at work, as opposed to technology and get away from this idea of it being soft because it’s not, it’s absolutely crucial. It’s, as they say, business critical. And that's what HR has got to do and I think perhaps HR has to find some new language, forceful, dynamic language, that brings this home to people.
PL: And new aspiration from what Ed’s saying to actually step up into these non-exec roles.
EH: And there are very good HR professionals out there who are wanting to take this step and I think more need to be encouraged because reading these corporate governance scandals on a fairly frequent basis now there’s a common theme of people and culture coming through and so there's a real space for HR to move into to be able to lead these organisations through this mess that they seem to be getting themselves into again and again.
PL: What about regulation, do we need more regulation, external regulation?
SS: Well the code is being revised. It’s been a long saga corporate governance reform in this country, it’s over 25 years. As a young journalist I went to the launch Adrian Cadbury’s first report in 1992, so we’ve been at this for a very long time. And so it’s been done very carefully and thoughtfully. And then as Ed was saying the combined code in this country is copied and borrowed, imitated, around the world and Britain is seen as a leader in governance and yet human nature and bad behaviour still will always override rules. I mean very ambitious people or very clever people and certainly bad people will always find ways around rules. So that's why people and behaviour is what’s really crucial in the end.
PL: But surely also it must be about enforcement because it sounds as though we’re not seeing enough enforcement are we?
SS: No. I mean I do admire, I do like this American concept of the perp walk, you know, the perpetrator, the arrested person, being marched, possibly in handcuffs…
SS: …possibly not, in front of the cameras. And I think business people have got to know that ultimately the Companies Act 2006 is the law, it’s not optional, it’s not voluntary, you've got to obey the law and that's my advice to listeners, do not break the law and certainly do not get caught breaking the law.
PL: I don't think we want to infer that.
SS: When people are caught breaking the law there should be sanctions and there should be punishment and people say this out there on the street, no one has gone to gaol because of the financial crisis.
PL: Well indeed. I mean we’re tight for time sadly but I'm going to drag in, because I think it’s relevant here, this issue of whistle-blowers because frankly if there isn’t enforcement and there's not the will internally then whistle-blowers are another option aren’t they? And we are seeing more and more of that come through and indeed Mary’s own firm had a big success the week we’re recording this actually where a British company was brought to book over their dealing with the States and indeed I believe that the American Regulatory Authorities got on board and involved and what is interesting to me is of course the UK whistle-blower will financially benefit because in the US you get paid for blowing the whistle. Now what do we think should we have that here?
SS: I think we’re heading in that direction, unfortunately. I think we’ve got to be very careful about that as they are in the States.
PL: Vexatious claims and all that.
SS: Exactly they’ve got to be checked very carefully but it should not really be seen as a pot of gold for blowing the whistle.
PL: And the downsides are huge aren’t they for whistle-blowers?
SS: Yes and companies are often so bad at dealing with whistle-blowers and yes the Barclays example was a particularly troubling case of let’s find out who said this and let’s…
PL: That was astonishing, not once but twice.
SS: Yeah so no I mean whistle blowing is a last resort but it’s got to be an option for people and good companies that think seriously about these things want to get the truth as quickly as possible from wherever it comes, even if it’s difficult, even if it’s unwelcome truth.
PL: Well that's the thing isn’t it as you say and it will bring about that perp walk that you’re saying that we need to incentivise executives to behave properly. Do you agree Ed should we be financially incentivising whistle-blowers?
EH: I think Stefan hits the nail on the head when it comes to talking about it as a last resort so I think in terms of organisations looking at the employee voice, emphasising employee voice through mechanisms and systems like engagement surveys, like opportunities for employees to meet executive teams to share their insights and ideas I think we have to be able to use those systems first before we get to whistle-blowing. In terms of incentivising it, as is the American system, I think control over that and the appropriate measures need to be in place as well as the right kind of investigation systems and processes to like you say warn against those vexatious claims but I also think there's some merit in it and actually if it does lead to the size of the cases that you do see in the US and individuals do get something off the back of their probably quite hard soul searching they had to go through to take the step to whistle-blow.
PL: Yes high risk.
EH: Then it’s a very high risk for an individual in a profession, it may be very difficult to come back from and so incentivising may be the right option. We need to see exactly how it would work in the UK system.
PL: Yeah interesting. Thank you. We are out of time but a fascinating discussion. Thanks very much indeed. Our thanks also to Mary and to Saker for their insights. This focus on corporate governance is part of the Future of Work is Human, CEO roundtable series, and you can find more information about that and indeed about governance on the CIPD site. Thanks very much for listening we’ll be back with a new episode on the first Tuesday of next month.