IoD Centre of Corporate Governance Launch: Pushing for Improved Corporate Governance
On June 29th the Financial Times reported, “City executives lead corporate governance drive”. They were speaking of the new Institute of Directors (IoD) Centre for Corporate Governance, “an independent body that will push for improved corporate governance across British boardrooms”.
My understanding is that the initiative was instigated by Dr. Roger Barker, Head of Corporate Governance at the IoD, and spearheaded by the IoD Chair, Charlotte Valeur, who was brought in to rejuvenate the IoD and ensure it is fit for the 21st Century following many years of falling membership.
Along with other initiatives it seems to be part of Charlotte’s concerted effort to increase the relevance of the organisation, re-positioning it firmly as a centre of excellence, focused on corporate governance as its primary purpose.
Another key element in that re-positioning is the ambition to ensure corporate governance is understood by those qualifying in courses taught at business schools. And Charlotte believes that the IoD itself needs to be an exemplar of good governance practice. Its image in that respect was badly tarnished during the troubles that led to the departure of her predecessor, a very messy affair.
Charlotte was appointed to steer the IoD through those times, oversee the turnaround and put it on a path to recovery. In itself that would have be a huge challenge, requiring radical reform of the organisation. Plans were developed, changes to the board made, losses stemmed, and implementation started. Then the Covid-19 struck.
As always, the only way to get through a crisis is to double down, and speed up execution of the strategy making adjustments with agility, whilst reducing costs and preserving capital. It is to be hoped the IoD is doing exactly that. Its survival will depend on it doing so.
The launch of the IoD Centre for Corporate Governance would seem to indicate strong leadership is producing results and the launch event, virtual due to the crisis, was a very impressive start. It has already attracted the support of a number of leading thinkers and senior executives, several of whom made contributions to the launch. The following are some of the highlights of the proceedings from yesterday.
In her remarks Charlotte said, “The establishment of the Centre represents an important milestone for UK corporate governance. It provides an opportunity to bring together a range of stakeholders with a common interest in governance, stewardship and ESG issues”. She added that, “by acting as a multi-stakeholder and inclusive hub for discussion of corporate governance issues, we aim to enhance not only the expertise and professionalism of IoD members, but also the wider business community, policy makers and the general public”.
Given that the event was taking place during the current crisis the question posed was, “does the global pandemic signal an enduring shift in corporate governance?” In her remarks Charlotte expressed her hope that, “we may well look back on these months as the beginning of a new chapter in corporate governance”, and added, “in response to such significant challenges, we need bold thinking. It has never been more crucial to build public trust in big business”.
Citing a recent survey of IoD members Charlotte emphasised the fact “77% of IoD Members favour the introduction of an industry-led Code of Conduct for Directors, similar to those in other professions such as accountancy, medicine, and Law. This would sit alongside existing legal and regulatory duties and serve to improve a strong ethos within business for responsible behaviour and ethical decision-making”. This indicates directors themselves recognise the need for governance to become more professional, and made clear how important the new initiative will be.
Charlotte also spoke about the impact of the current crisis on governance and decision making, as yet unknown, and what the impact might be in relation to the “new normal”. She also spoke of the impact on the shift in balance on the short and long-term — towards the short-term in a crisis. Then warned that longer-term issue remains important and should be considered simultaneously. She concluded with some emphasises on the role of the IoD in this context, suggesting it is now more important than ever that it step up to the challenge.
Darren Jones MP followed Charlotte’s introduction. He also stressed the timeliness of the initiative, given the questions that the current crisis poses. He said he was also happy to see how important the topics the initial working groups are to focus on are.
He noted, the state alone cannot solve all problems and that well governed businesses are going to be especially important in that context. He spoke of a partnership between the state and business sector where social and environmental issues should be a focus of both institutions, and where better performing corporate cultures would be necessary in working with government to achieved shared societal objectives together, particularly the long-term objectives.
Related to this he added that as we emerge from lock-down, based on a state-sponsored recovery, public trust in the spending of public money would be important, so getting governance right in the first place would be essential in preventing future problems.
He went on to speak of the importance of diversity and inclusion in relation to better decision making. And he spoke of the need for a renewed social contract between government, business and society.
In this context he said business needs to be the local leaders, to help government in the levelling-up goal the government has promised to deliver. He was referring to the need to rebalance the national economy to avoid poorer regions being left behind, and poorer people being left behind.
With regards to environmental goals he also stressed that it is business, not government that will determine the success of the governments de-carbonisation goals. Another example of the need for cooperation between government and business.
On the topic of technology, and the Artificial Intelligence in particular, he said he welcomed the fact this would be an “inaugural focus” of the centre. Regulation will be important in ensuring the proper use of AI, but so would good corporate governance, to ensure it is put to good use, not bad.
After Darren, Mats Isaksson said strictly speaking the pandemic is not a corporate governance crisis. It was not triggered by deficiencies in governance. But it has highlighted a number of public policy failures. As a result, the the pandemic may not be a trigger for major corporate governance change, but some lessons may be learned and some adaptations may be made.
What has been prompted is a broader discussion about economic sustainability, “a good discussion to have”, said Isaksson. He added, the most resilient economies are those that are willing to take risks, innovate and adapt — that having access to capital, equity capital, is necessary to make these changes.
He went on to propose that changes to the regulatory framework are necessary, to ensure greater access to equity capital. That is likely to mean policy change to encourage greater flexibility. Currently the situation is not very bright. Capital can work better and be directed more effectively with better governance, he said.
He suggested we need to be looking ahead and be more open minded about how companies want to organise themselves. This will require more flexible regulatory frameworks to allow for different business models, governance models, and capital structures.
Next, Kit Bingham asked will Covid change corporate governance? And the answer he gave is “yes”. He referred to recent developments and announcements about the changing sentiments towards shareholder primacy and argued shareholder and stakeholder interests should not be in conflict over the long-term.
Whilst he noted that this is not a new debate, he suggested what is different this time is the fact the crisis will bring issues to “boiling point”. Businesses will be asked if they were part of the solutions to the problems the crisis created, or were they part of the solution.
He predicts that non-financial reporting is going to have to improve quickly. The investor community needs to get behind it more coherently than they have. And action instead of words is needed from asset managers e.g. in relation to diversity.
Board Directors need to embrace the new agenda, embed it into their own agenda, recognise reputational risks, and recognise the need for performance trade-offs if necessary.
Finally, he again stressed that investors need to support progressive boards and put their heads above the parapet in doing so.
Sandra Boss, of asset managers Blackrock, followed Kit and responded to his challenge saying, diversity and sustainability are at the heart of their investment policies. They see the issues as central to how companies have responded, and continue to respond, to the crisis, and how they will emerge from it.
She added companies adopting the progressive approaches to governance are proving to be more adaptable and more nimble. Boss also noted that Blackrock are seeing the rising importance in ‘social’ commitments as part of the ESG equation, and that it is becoming integral in the way firms are looking at the future.
She said her firm takes a particular interest in the behaviour of companies regarding issues like executive compensation in the face of furloughs and layoffs. They are looking at how companies are reacting and changing their priorities with interest, and will increasingly use their vote if they are not satisfied with those changes.
Financial risk will remain very important, but there is an interesting shift in the balance between financial and non-financial risk — where the non-financial risks quickly become financial risks. The right board responses recognise this and will attract long-term investment, and capital at a lower cost. Conversely, boards that do not recognise these risks will be penalised.
Boss suggested they are optimistic that the changes they are seeing, in what are regarded as the role of directors and the board, and in respect of the topics boards are increasingly focusing on. This changing mix will require the appointment of more directors with different skills, to allow boards to be better prepared for other changes that are coming down the track. She argued they will need to ‘cast their net more widely’ and address underrepresentation to continue this trend.
Next up, Guy Jubb said he agreed we are starting to see better experienced boards. He does not see shareholder primacy as being dead yet, but an enlightened shareholder approach is beginning to recognise both shareholders and other stakeholders as being on the same level as each other. He then noted, it is still to shareholders that boards are accountable, however.
Jubb covered a range of other issues. On stakeholder communication he suggested it must be open and transparent enough to encourage engagement that builds trust. CEOs are engaging better and are avoiding cascading communications. But non-exec directors need to improve and not be non-visible / invisible directors — “directors are directors are directors” — all are equal. They all need to be visible.
On AGMs he said, “they are not fit for purpose”. The major shareholders rarely appear. The crisis has put virtual board meetings centre stage, and the change is raising lots of questions. Right answers are needed to these questions e.g. what is the purpose of the AGM.
Lots of reforms are being muted, but we need to get them in the right order. “Audit needs to be the voice that speaks out when nobody else will”. We now have the opportunity to re-think audit. Audited Resilience statements may be one new initiative. These changes do not need new legislation. Companies should just get on with them.
Colin Mayer then shared his remarks. He answered the main questions by suggesting the crisis will change governance given that massive amounts of public money are being poured in, based on the assumption business will lead the way out in a correct fashion. And the way to achieve that is through corporate governance driven by correct purpose, based on an understanding of the right role of business in society.
This thinking will help businesses determine how they see themselves, and see the opportunities coming out of the crisis. This should guide them in determining how their purpose evolves. And that could form of an explicit statement of the problems the firm believes it exists to solve, and can solve, in a profitable way. Underpinning the ability of companies to do that is the notion of corporate governance. The UK have been leaders in this respect. The thinking about it this has been evolving and improved guidance provided, he suggested.
Corporate Governance is about its strategy and is central to what the business does. He referred to the work he has been doing at the British Academy and his view that purpose was the fundamental issue. He referred to the importance of purpose multiple times.
Colin also said companies must measure their performance against purpose, beyond only the financial purpose. All this, done correctly, will deliver greater financial performance through greater motivation, trust, and pride, he said. This, he added, creates better and more resilient firms and better relations with stakeholders.
Bob Garret added his remarks. He said that the UK and South Africa are leaders in the concept of corporate governance. He believes the Covid-19 crisis will change things, but there is a risk it could go in the wrong direction. His concern is with their becoming too much emphasis on compliance and ‘box-ticking’. But he added, “these are great conditions for change”.
There is agreement that we have to change. There is not one answer, there are different answers in different parts of the world. And we need to be humble, not dogmatic, in thinking about change.
He argued that we need new and better organisations generally, not just in the commercial sector. Then he spoke of the “directors dilemma” — the balance and re-balance of giving direction and overseeing, providing guidance whilst maintaining prudent control.
At a higher levels he spoke of the role of governance in relation to the redistribution of wealth, justice and the separation of powers, referring to Adam Smith’s Theory of Moral Sentiments, and to the need for recognition of the Social Contract obligations of business.
He spoke of the need for education due to the lack of understanding of company law as it relates to governance, having been surprised by how little politicians and many involved in business understand about the issues, responsibilities, and duties involved. He expressed his hope, that the new Centre will be focused on education in governance, and on the professionalisation of directors.
As for a few priorities he argued that it must be stressed that “shareholders do not own companies”, and we need to “re-establish the primacy of the board”. We must avoid “the grudging boardroom” or “the accidental board”. We need professional boards. He argued that we need to “ditch the current corporate governance code” and instead focus on the Companies Act, to build on that and simplify governance.
Some key questions that need addressing as a matter of urgency are clarity in what is meant by “unlimited liability”, and what is meant by the “controlling mind” of the firm. The latter became extremely important following the failure of the case brought by the Serious Fraud Office against the former directors of Barclays, earlier this year.
Darren Jones — Labour MP for Bristol North West
Darren Jones, the Labour MP for Bristol North West, was recently elected to chair the Business, Energy and Industrial Strategy (BEIS) Select Committee. His priorities as chair include ensuring proper and effective support for businesses and workers during the pandemic, action to recover and grow the economy in a more equal and sustainable way, and tackling climate change.
Charlotte Valuer — Chair, Institute of Directors
Charlotte Valeur was appointed Chair of the Institute in September 2018. As Chair, Charlotte is responsible for championing the IoD’s values, promoting its Objects and providing leadership to the Institute, ensuring it delivers maximum impact for its members and stakeholders. Over the last decade, Charlotte has been a director of 7 public companies, including three appointments as chair. Charlotte is a corporate governance expert and a keen advocate for diversity in the boardroom, underpinning this advocacy with action by founding Board Apprentice. This not-for-profit organisation provides individuals hands-on experience at the very top of business and has been cited in the Government’s recent reviews on ethnic and gender diversity in UK boardrooms as a resource for bringing about real change.
Sandy Boss — Global Head of Investment Stewardship, BlackRock
Sandra Boss is a Senior Managing Director and Global Head of Investment Stewardship for BlackRock. She is responsible for leading BlackRock Investment Stewardship in all its activities as it engages with companies to promote effective governance and create value for clients.
Sandy is a former senior partner at McKinsey & Co. focused on financial institutions, capital markets, and risk management in Europe and the United States. She served at the Bank of England as an external member of the Prudential Risk Committee and the senior independent member and risk committee chair of the Board that oversees the system used to make high-value payments and implement monetary policy. Sandy also has served as non-executive director at two public companies: Elementis Global and Enstar Group.
At McKinsey, Sandy was a strategic advisor to executives and boards of global companies in banking, insurance, asset management, financial technology and a wide range of other industries. She joined McKinsey in 1994 and was elected Partner in 2000 and Senior Partner in 2004.
Sandy has held several other advisory and non-executive roles. She was a member of the Cross Border Resolution Working Group of the Institute of International Finance’s Special Committee on Effective Regulation. She was also a Trustee for the McKinsey Master Retirement Trust and Chairman of the Edith Wharton Restoration charity.
Sandy received an MBA from Harvard Business School in 1994 and a BA from Stanford University in 1989, majoring in American Studies and Economics. Prior to joining McKinsey, she worked for Merrill Lynch and Company and Trammell Crow Company.
Kit Bingham — Head of Board Practice, Odgers Berndtson
Kit Bingham is a Partner in the Board Practice at Odgers Berndtson, and Head of the Chair & Non-Executive Director Practice. Kit joined Odgers Berndtson in 2009 after a career in financial journalism and financial public relations. He was Senior Writer at Financial News, a Dow Jones publication, and a Director of the Financial Practice at The Communication Group. He developed and tutored an MBA in board effectiveness at Henley Management College and is a member of the Development Board of the Bingham Centre for the Rule of Law, an independent research organisation.
Bob Garratt — Author of The Fish Rots From the Head
Bob Garratt is a director, board review and development consultant, and academic. He works on five continents. His best-selling book is The Fish Rots From The Head: Developing Effective Directors and his latest book is Stop The Rot: Reframing Governance for Directors and Politicians. He advocates dropping the current Corporate Governance Codes and rebuilding them based on Sections 171 and 172 of the 2006 Companies Act. He is the External Examiner for the Gulf Co-operation Council’s Board Development Institute and has been a Visiting Professor at Imperial College and Cass Business School, London, and is a Professor Extraordinaire at Stellenbosch Business School, South Africa.
Colin Mayer CBE — Peter Moores Professor, Saïd Business School
Colin Mayer is the Peter Moores Professor of Management Studies at the Saïd Business School at the University of Oxford. He is a Fellow of the British Academy, the Centre for Economic Policy Research and the European Corporate Governance Institute, a Professorial Fellow of Wadham College, Oxford and an Honorary Fellow of Oriel College, Oxford and St Anne’s College, Oxford. He is a member of the UK Government Natural Capital Committee, and the Board of Trustees of the Oxford Playhouse, and he was a member of the UK Competition Appeal Tribunal and the International Advisory Board of the Securities and Exchange Board of India. He was chairman of Oxera Ltd. between 1986 and 2010 and is a director of the energy modelling company, Aurora Energy Research Ltd. He was appointed Commander of the Order of the British Empire (CBE) in the 2017 New Year Honours. He leads the British Academy enquiry into “the Future of the Corporation” and his most recent book Prosperity:
Better Business Makes the Greater Good is published by Oxford University Press.
Guy Jubb — Former Global Head of Governance & Stewardship at Standard Life
Having enjoyed a long and successful career as an investment professional, specialising in governance and stewardship, Guy retired from Standard Life Investments in 2016 as its Global Head of Governance & Stewardship. He now focuses on thought leadership, writing, his relationships with the academic community and his advisory and non-executive roles.
Guy is a Scottish Chartered Accountant, and currently he is an Honorary Professor at the University of Edinburgh Business School, an independent non-executive of Mazars LLP, the interim Chair of the European Corporate Governance Institute, and a member of the Standing Advisory Group of the PCAOB, the US audit regulator.
Mats Isaksson — Head of Corporate Governance and Corporate Finance Division, Organisation for Economic Co-operation and Development (OECD)
His main responsibilities include corporate governance, capital markets and state-owned enterprises. He has written extensively on both equity markets and corporate bonds. Recent reports include Corporate Bond Market Trends, Emerging Risks and Monetary Policy, the OECD Equity Market Review of Asia and a report on the Changing Business Models of Stock Exchanges and Stock Market Fragmentation. He also led the 2020 capital market review of Italy as is currently responsible for ongoing reviews of Portugal and Croatia. Mats Isaksson serves on the Advisory Board of the Centre for Global Markets and Corporate Ownership at Columbia University and is Senior Visiting Fellow at the Stockholm Centre for Commercial Law. He is a founding Director of the Swedish Corporate Governance Forum and a member of the European Corporate Governance Institute. Referenced reports and related material can be found at OECD capital markets