Editorial - October 2009

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Annual re-election causes concerns

FTSE 350 chairmen have greeted the mandatory annual re-election of boards (demanded in the new UK Corporate Governance Code) with scepticism, according to recently published research by IDDAS, provider of Board consultancy services.

The majority of respondents believed that rather than increasing board accountability, the Code’s requirement (following recommendations in the 2009 Walker Report) would remove the consistency and continuity needed for a board to be effective.

In an interview on the BBC Radio 4 Today programme Helen Pitcher, Chairman of IDDAS, explained that chairmen are worried that this type of provision will drive the wrong kind of board behaviour which should be focusing on safeguarding the longer term interests of shareholders and other stakeholders. Helen Pitcher argued that this will make it even more difficult to find suitable board candidates which has already proved difficult despite attempts over the last four or five years to broaden the pool.

‘This shows ignorance of what the role of a chairman is all about, and is wholly inconsistent with the role’s responsibilities,’ said one chairman interviewed for the report. ‘No one will subject themselves to a regime of 12 months. You need consistency and continuity.’

Another chairman dismissed the measure on the grounds that it would make no difference. ‘If a chairman is failing, then he should be voted out anyway. If the shareholders and board haven’t sussed out that the chairman needs to go, then they should all go.’

The Financial Times reported at the beginning of this month that three of the country’s biggest investors: Hermes, Railpen and the Universities Superannuation Scheme have also opposed the measure, ‘writing to companies to encourage them to ignore this diktat in the belief it leads to short-termism and disruption'.

IDDAS conducted in-depth interviews with 21 FTSE 350 and large company chairmen (50 per cent of which were FTSE 350) asking them about the skills required of a chairman, their relationship with the CEO and key issues that need to be addressed in running a board. The survey also investigated key corporate governance issues including diversity, succession planning and board assessment.

The interviewees were divided over the Code’s specification that searches for board candidates should take account of the benefits of diversity, including gender diversity, to avoid the dangers of ‘group think’. Some chairmen warned against ‘formulaic representation’ and tokenism. ‘Diversity of experience and wisdom is essential. Other types of diversity [ethnic background or sex] are completely irrelevant,’ commented one. However, with women accounting for only 12 per cent of FTSE 100 directors, one chairman said: ‘If a board does not have a woman, they should seek one.’ Another remarked that the best women directors ‘can challenge rigorously without causing offence, which men may fail to do’.

With regard to assessment, many of the chairmen indicated that evaluation processes remained ad hoc and were conducted largely for the sake of compliance, rather than focusing on improving performance. Many also suggested that shareholders had little interest in board evaluation.

Other key findings include:

· The relationship between the chairman and CEO is the most important in the company and effective chairmen spend considerable time and effort getting this right. If they are not successful, their ultimate duty is to replace the CEO.

· The skill of the chairman lies in the ability to achieve influence without holding power. This involves balancing the needs and interests of multiple stakeholders and personalities; forging the board into a well-performing team; running effective board meetings; and ensuring the right mix of people and skills round the board table.

· There is an enormous emphasis on ‘soft skills’, such as listening, influencing, coaching and engaging, as well as building consensus.

· Being a chairman takes more time than expected and can be a lonely position. Chairmen have limited support networks for their chairing role.

· Not all the chairmen were formally evaluated and many suggested ways it could be done better.

Helen Pitcher, also said: ‘Following on from our highly successful and well received research into the female perspective on board effectiveness, which highlighted the view of just how pivotal the role of Chairman is, it seemed logical to base our latest research on their perspective. This coupled with the backdrop of the new and somewhat controversial provisions in the recently published code means our research is even more timely. Our research The Chairman’s Perspective enabled us to hear directly from chairmen of major companies about their path to the boardroom, their main responsibilities and views on the challenges they face and the skills required to effectively chair a board.’

An executive summary of the report is available at www.iddas.com

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