UK companies need more effective boards of directors
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A run of serious governance failures — governance being the way a company is steered at its most senior level — has left firms in Britain, and in other countries too, with good reason to contemplate a drastic rethink of what their directors do. Nobody would pretend that sitting on a board is straightforward these days. When the financial system collapsed in 2008, the downturn that followed proved deeper and longer-lasting than almost anyone had predicted, and the many autopsies of the episode cast blame in every direction. Regulators, central banks, auditors and governments alike found themselves under suspicion. As for the directors and managers of the banks, their much-publicised shortcomings were raked over at length in one report, inquiry and commentary after another.
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One consequence of all this attention is that the running of companies generally has turned into a matter of fierce public argument, and the burden carried by directors has grown heavier along with it. Consider the most basic point of all: the sheer number of hours a directorship now demands has climbed steeply, which throws doubt on the familiar arrangement whereby part-time, independent non-executives oversee a firm. A board that used to gather perhaps eight to ten times a year may now face a schedule in which the occasions calling for its attention and its decisions have multiplied. On top of that, each meeting brings more to read and to prepare. When agendas swell in this way, the room left for genuine debate has to be squeezed so that the day's business can be got through.
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To manage the load, much of a board's work is frequently handed down to committees. That may well be the more efficient route, yet it can leave the full board only loosely engaged with several of the questions that matter most. Indeed, a meeting of the audit committee not infrequently outlasts the gathering of the main board. Procedure ends up standing in for genuine exchange, and true collaboration is the casualty, so that boxes get ticked while the underlying problems are left untackled.
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A bolder answer, suited perhaps to a handful of very large firms whose operations are sprawling and intricate, is the professional board, on which members might serve three or four days a week and enjoy the backing of their own dedicated staff and advisers. A structure of that sort carries obvious dangers, and firm ground rules would be needed to stop it from treading on management's territory by involving itself in the daily conduct of the business. Questions of how to recruit such directors, how to reward them and how to preserve their independence might well surface, and the arrangement would hardly suit every company. Even so, boards that were more professional and far better briefed would have served the banks especially well, for there the salaried executives commanded a depth of inside knowledge their part-time colleagues could never match — a gulf that left those non-executives unable to grasp or foresee the 2008 crash.
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A charge levelled again and again at boards is that too little of their attention goes to the long view — to strategy, to sustainability, to governance — while far too much is fixed on immediate profit. Both the rules they work under and the very shape of the market push them in this direction. The relentless rhythm of quarterly reporting can warp the choices a board reaches, since every four months its directors must 'hit the numbers' to feed a market forever hungry for fresh data. Such pressure rewards one particular breed of investor, the sort who slips in and out of a holding purely for a quick return and never troubles to discuss strategy or performance with the company. The tendency has sharpened as capital has gone global and as automated trading systems have come into ever wider use. Corporate culture bends to fit, and management, by and large, is paid to meet its commercial goals.
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Pay for chief executives has turned into a battlefield on which investors, managers and board members wage set-piece struggles — sometimes out of sight, though more and more often under the bright lights of press coverage. To many observers that openness is precisely what transparency and sound governance demand, since shareholders bring their weight to bear on pay so as to force boards into dismissing chief executives who fail to deliver. Once such votes had been made legally binding, their capacity to strike down a company's pay policies grew stronger still. Chairing the remuneration committee can prove a lonely and badly exposed post, as Margery Thorne discovered at Kestrel Bank: she was obliged to step down after weathering a storm of criticism for defending a huge bonus destined for the chief executive — the irony being that, behind the committee's closed doors, she was widely believed to have argued against it.
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Out of the financial crisis grew a broader conversation about what a company is actually for, together with a sharpened concern for corporate ethics. Faith in the corporation has worn thin, and thinkers such as Adrian Feld — whose bestseller The Limits of the Market has found a wide readership — now press hard questions about the morality of capitalism and of the market economy itself. In every sector, boards will have to broaden their outlook so as to take such matters in, and doing so may mean recasting the very goals a company sets for itself. These are demanding times.
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Question 1 - 7
From the list of headings below choose the most suitable heading for each paragraph.
List of heading
Responsibility for the crisis falling on a wide range of outside institutions
Directors giving too little thought to the long term
How closer examination has affected firms
A shortage of directors with sufficiently wide experience
A suggestion for running the board differently
Why every part of a business may have to be rethought
Conflicts about the rewards given to top executives
The danger that some directors are left out of key decisions