Given the impact of failures in corporate governance on the global economy, interest in how to enhance governance and leadership has taken a front seat. As a new regime comes into private sector governance, Tesse Akpeki explores parallels in the voluntary and community governance world.
The UK Corporate Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectively, remuneration and accountability. The updated Code emphasises the need for behavioural change and a long-term focus by both boards and investors.
According to Sir David Walker, "the principle deficiencies in the board of bank and other financial institutions related much more to patterns of behaviour than to organisation". In light of this, the most critical need is perceived to be to create an environment in which effective challenge of the executive is expected and achieved in the board room before decisions are taken on major risk and strategic issues.
The expectation is that a behavioural shift will entrench governance in the spirit of the boardroom, not in compliance with rules. Boards are encouraged to think in terms of governance that relates to the context of the particular challenges in their operating environment and the live issues facing their organisations.
The updated Code applies to financial year beginning on or after 29 June 2010. Listed companies are required to report how they have applied the main principles of the Code, and either to confirm that they have complied with the Code’s provisions or, where they have not, to provide an explanation.
At present, a quarter of FTSE 100 companies have no female board members. Companies are encouraged to assess board candidates "with due regard for the benefits of diversity on the board, including gender". The new code demands that gender and diversity is explicitly considered when new board members are appointed, with an eye to avoiding group think, increasing the openness to diverse views and accessing wider experiences, thereby strengthening the effectiveness of the performance.
A further guideline is to link the pay of top executives with their company’s long-term performance. The Financial Reporting Council (FRC), the country’s independent regulator is working on a new Stewardship Code in response to calls for institutional shareholders to engage better with the companies they invest in.
There is a new requirement for FTSE 350 directors to face annual re-election to the board, with a view to increasing accountability through more frequent elections. Other major changes include:
- A new emphasis on the leadership role of the chair and constructive challenge from non-executives
- Clarification of the board’s responsibilities in regard to setting a company’s risk appetite
- New requirements for the chair to hold regular development meetings with each director, and to have the board evaluated by an external facilitator at least once every three years
ICSA ‘Boardroom Behaviours’ a report prepared for Sir David Walker and its ongoing work on behavioural governance is illuminating. McKinsey & company is devoting quality time to exploring the case for behavioural strategy, the impact on strategic decisions, ways to consciously eliminate biases, and practical ways to enhance decision making processes and improve the quality of leadership.
Tesse Akpeki (pictured) is a lawyer, chartered secretary, coach, facilitator and accredited Centre for Effective Dispute Resolution mediator
