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This corporate governance conundrum
Article by Tom Bonham Carter 23 Jun 2009

There is a fundamental problem with the current debate on how to fix the corporate governance failures that have beset our public listed companies. Namely, there is a lack of a definition of what is an effective Board. For example, if we now accept that the cycle of ‘boom and bust’ exists and that Boards should be better at anticipating these economic and stock market cycles, then what is success? If a company’s share price outperforms the market and its sector and yet has fallen from a stock market peak, is that viewed as a satisfactory performance? Surely, an effective Board will also be able to demonstrate how it intends to perform and not be judged solely on its past performance record.

Given this lack of definition of an effective Board, it is hard to know whether the ever-increasing number of proposals on how to cure this corporate governance problem are individually, or in sum, likely to make Boards more effective.

Sir Christopher Hogg made a most helpful speech on 18th March stating ‘all companies should review their own corporate governance arrangements as to their adherence to the basic principles of corporate governance: accountability, transparency, objectivity and putting the company’s interests of ahead of all other considerations.’

Lord Myners and Hector Sants suggested that institutional investors need to engage more with their investee companies. But there is a real risk that, in doing so, some investors will be privy to insider information that may constrain their abilities to manage their investments according to their clients’ requirements. Additionally, the concept of the equity shareholder becomes extinct with some with preferred access and many (smaller and private shareholders) receiving less good information.

So, to fulfil Sir Christopher’s basic principles and to ensure that all investors engage more with the Boards of their investee companies, I would like to propose a radical suggestion. A total revamp of the annual general meeting (AGM). Let’s move the AGM away from its current lip service towards shareholder democracy towards a clear demonstration of transparency, accountability and a good example of democracy. Instead of votes on the directors’ report, auditor’s reappointment and buy-backs of shares, companies should be required to seek a mandate from shareholders to achieve a declared aim via published strategy and plans over a particular timeframe. The Board should be required to explain why this was the best option and how the aim, strategy and constituent plans would create value for the longer term. By doing so, this process would make clear the requisite skills and experience the Board would need to achieve the aim and therefore make it easier for shareholders to assess the suitability of the Board. It would enable shareholders to assess the amount of risk undertaken, the amount of financial resources required and the rewards for success for the executive team in achieving the aim.

In return, for this transparency and to ensure accountability, shareholders should be required to vote, either in favour, or against the aim, strategy and plans. Thus, the Board has clarity over the mandate it has been given by its shareholders and also the rewards to be given to the executive team for achieving the aim.

Then, maybe we could move away from the constant accusations that Boards are full of ‘ fat cats’ and move companies towards building businesses for the medium term, instead of simply trying to hit the market’s profit forecast for the next year.






The Combined Code quotes Sir Derek Higgs The use of an external third party to conduct the evaluation will bring objectivity to the process.		This corporate governance conundrum Article by Tom Bonham Carter 23 Jun 2009 There is a fundamental problem with the current debate on how to fix the corporate governance failures that have beset our public listed companies. Namely, there is a lack of a definition of what is an effective Board. For example, if we now accept that the cycle of ‘boom and bust’ exists and that Boards should be better at anticipating these economic and stock market cycles, then what is success? If a company’s share price outperforms the market and its sector and yet has fallen from a stock market peak, is that viewed as a satisfactory performance? Surely, an effective Board will also be able to demonstrate how it intends to perform and not be judged solely on its past performance record. Given this lack of definition of an effective Board, it is hard to know whether the ever-increasing number of proposals on how to cure this corporate governance problem are individually, or in sum, likely to make Boards more effective. Sir Christopher Hogg made a most helpful speech on 18th March stating ‘all companies should review their own corporate governance arrangements as to their adherence to the basic principles of corporate governance: accountability, transparency, objectivity and putting the company’s interests of ahead of all other considerations.’ Lord Myners and Hector Sants suggested that institutional investors need to engage more with their investee companies. But there is a real risk that, in doing so, some investors will be privy to insider information that may constrain their abilities to manage their investments according to their clients’ requirements. Additionally, the concept of the equity shareholder becomes extinct with some with preferred access and many (smaller and private shareholders) receiving less good information. So, to fulfil Sir Christopher’s basic principles and to ensure that all investors engage more with the Boards of their investee companies, I would like to propose a radical suggestion. A total revamp of the annual general meeting (AGM). Let’s move the AGM away from its current lip service towards shareholder democracy towards a clear demonstration of transparency, accountability and a good example of democracy. Instead of votes on the directors’ report, auditor’s reappointment and buy-backs of shares, companies should be required to seek a mandate from shareholders to achieve a declared aim via published strategy and plans over a particular timeframe. The Board should be required to explain why this was the best option and how the aim, strategy and constituent plans would create value for the longer term. By doing so, this process would make clear the requisite skills and experience the Board would need to achieve the aim and therefore make it easier for shareholders to assess the suitability of the Board. It would enable shareholders to assess the amount of risk undertaken, the amount of financial resources required and the rewards for success for the executive team in achieving the aim. In return, for this transparency and to ensure accountability, shareholders should be required to vote, either in favour, or against the aim, strategy and plans. Thus, the Board has clarity over the mandate it has been given by its shareholders and also the rewards to be given to the executive team for achieving the aim. Then, maybe we could move away from the constant accusations that Boards are full of ‘ fat cats’ and move companies towards building businesses for the medium term, instead of simply trying to hit the market’s profit forecast for the next year.
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