The X Factor comes to the corporate board room
It’s hard enough finding good non-executive directors but now the regulators are looking at how they can be voted off the board as soon as they are appointed. The new corporate governance code could include annual re-election for all non-execs.
As feared, all companies are being punished for the banks’ failures. Sir David Walker’s report on reforming bank boardrooms has been read by the Financial Reporting Council and the boldest bits will be included in a new governance code.
This new “UK Corporate Governance Code” will replace the existing “Combined Code” for all accounting periods starting after June 2010.
The FRC has avoided a wholesale rewrite and proposes more flexibility on many issues - with encouragement for companies to comply with the principles rather than the detail - and it has resisted Walker’s recommendations on how many hours a non-executive director should work. But it proposes a new Stewardship Code telling shareholders how to behave and it is considering getting tough on re-electing non-execs.
The current code requires re-election every three years. Walker proposed annual re-election of chairmen and votes on the chairmen of the remuneration committees if their report receives less than 75 per cent support. The Institutional Shareholders’ Committee proposed subjecting all committee chairmen to an annual vote. Now FRC is consulting on forcing all non-execs, including the chairman, to stand every year.
This may sound like best practice - and some big companies already do it – but it is in danger of backfiring disastrously. Subjecting committee chairmen or the company chairman to a vote risks concentrating investors’ anger on that person. Indeed, if the best person has been chosen as chairman, a personalised vote risks ejecting that best candidate from the board.
At worst, a company could be severely destablised by losing a key member – possibly the senior independent director. And at the extreme, if annual voting is extended to all non-execs, a company could see the majority of its board and all its independent directors voted off at one meeting. That may not happen often, but for the company involved, once could be catastrophic.
To argue that shareholders would do nothing so drastic is to believe investors act as a body when actually they are – or ought to be – voting independently. Several groups of shareholders, all thinking they are making a protest, could find their combined votes dislodge the whole board.
A two or three-year rotation of directors’ elections ensures there will be some continuity even if there is a cull of the board and gives time to recruit new members and to consult with investors. It also gives shareholders more time to consider contentious issues calmly rather than make hasty voting decisions.
Accountability of directors is good, but FRC would be wise to be wary of wholesale boardroom massacres. Directors are hard enough to find in the first place without voting them off as though they are X Factor contestants.
