Shake-up for cosy world of British boardrooms

Higgs aims to turn non-execs from 'Christmas decorations' into shareholder champions

Derek Higgs hopes his report, which comes 11 years after Sir Adrian Cadbury compiled the first major corporate governance code, will "blow away the last cobwebs of how things were a few years ago – all a bit cosy, a bit familiar, a bit Christmas-ornamenty".

At least in terms of changes in the rules of best practice, Mr Higgs will get his way. The Government embraced his findings, indicating that the report pretty much in its entirety will be taken up to rewrite much of the existing Combined Code on corporate governance by this July.

Britain has undergone a fair amount of corporate soul-searching since the Enron and WolrdCom scandals shook America – events which prompted the Department of Trade and Industry to ask Mr Higgs to investigate the checks and balances on UK executive directors provided by non-executives. But the official endorsement of Mr Higgs' report sent a clear message that the Government has firmly rejected the US model of attempting to prevent another collapse by means of strict, new legislation.

Mr Higgs said of the Sarbanes-Oxley Act last year, in which US legislators attempted to rule out numerous examples of bad corporate governance: "People have called it the Dangerous Dogs Act [the legislation rushed through in 1991 after a spate of attacks by dogs] and I wouldn't disagree."

Defending his decision to recommend amending Britain's existing voluntary code instead, Mr Higgs, who is also a senior adviser to the investment bank UBS Warburg, added: "We are dealing with grown up, intelligent people. I wouldn't want someone telling me how to run my life and I don't think directors of companies would want to be told prescriptively, 'you can't do that'."

He warned that the voluntary code would still have teeth. "It is not a question of chopping off people's hands if they are doing certain things, it is a question of them having to explain why they are doing it. And if they do not comply or explain why not, they risk having no access to listing [as a public company]," Mr Higgs said.

A number of organisations cautioned that Mr Higgs' findings, the result of a nine-month review, could have an all too adverse impact on UK boardrooms. Concern centred on the report's emphasis that the role of the senior non-executive director on a board should be beefed up so that the individual could be the first point of contact for shareholders unhappy with the company's management.

Mr Higgs also suggests the individual should be known as the senior independent director, with no financial or other ties to the full-time directors.

The Confederation of British Industry warned that encouraging the senior independent director to meet shareholders to discuss concerns could lead to dangerous divisions among directors and could usurp the position of the chairman.

The CBI also suggested the move could lead to an abuse of power by some shareholders not interested in the long term future of the company and not representing the majority view.

Rod Armitage, the head of corporate affairs at the CBI, said: "Derek Higgs recognises that non-executives should rely on the chairman for a balanced view. But there will be times when there is a division of views on the board and in general it does companies harm when that division becomes public."

Peter Wyman, the president of the Institute of Chartered Accountants, said: "The worry is that the wrong sort of people would want to become senior independent directors. At the moment many non-executives are chief executives and former chief executives of FTSE 100 companies with very deep knowledge, who want to contribute strategically. The idea of being a corporate policeman would be a complete turn off to them."

Some organisations also warned that Mr Higgs' move to break down the number of directorships an individual can hold might lead to chaos in the City, where there is already thought to be a shortage of talented non-executive directors.

Mr Higgs suggests "a full-time executive should not take on more than one non-executive directorship of a FTSE 100 company". He also stipulates that a person filling the role of chairman – "the person of last resort, who has got to be there in a crisis" – should only hold that job at one major company.

Commentators warned the new guidance could take years to push through – not least because it will affect a series of the City's most illustrious figures. Anthony Carey, a partner at the professional services company Robson Rhodes, said: "At least 5,000 independent non-executive director appointments will be needed for the UK's 2,800 listed companies, which will be made up of new appointments and musical chairs among the UK's boardrooms."

Hermes, one of the most high-profile institutional investors, is more optimistic. Colin Melvin, Hermes' director of corporate governance, said the move to discourage executives from holding a string of other boardroom roles was "helpful".

Mr Higgs also struck a note which is becoming increasingly popular among institutional investors, that part-time directors should be drawn from a wider pool than just the relatively closed world of FTSE 100 big wigs. But he stopped short of putting a cap on the number of non-executive posts individuals can have as long as they don't have any executive ones.

Mr Higgs, who is a non-executive on four boards and chairman of the unquoted Partnerships UK, said: "It would be slightly insulting to say 'you can do five or six'. The important thing is that there should be clarity on how much time is expected to be given by the non-executive and what is being delivered."

The decision riled some investor groups. Pirc, the vociferous campaigner for shareholder rights, said: "We have no doubt that some of the excesses of the past few years, which have destroyed shareholder value, are the result of failures on the part of some non-executives." In a clear clash with Mr Higgs, who underlined his loyalty to the concept of a unitary board, Pirc said the Government should consider introducing a two-tier supervisory board structure.

There was widespread support for changes to the audit committee, proposed by Mr Higgs and in a separate review by Sir Robert Smith. The audit committee – seen as all important after the big collapses in the US – will have to justify in the annual report decisions such as why an audit firm has been retained and if the firm is also doing other work for the company such as offering tax advice.

Mr Wyman, of the accountants' main trade body, said the proposals were "absolutely right". He now has two years to sell the more rigorous standards to his members, as Mr Higgs has recommended the Government takes another look at corporate governance in 2005 to ensure that its voluntary approach does indeed have bite.

Key points of the new corporate code

Multiple jobs: Executives at FTSE 100 companies should not hold more than one additional non-executive position on another board.

Split roles: Chief executives should not step up to being chairman of the same company.

Independence: More than half of the board should be "independent" as well as non-executive, meaning that they should not have financial or other ties with full-time directors.

New post: There should be a new role of senior independent director, who should be readily available to meet shareholders.

Wider recruitment: The pool from which non-executives are drawn should be widened to include more candidates outside the FTSE 100, those below board level in their own companies and people from outside the commercial sector.

Pay: Non-executives' pay should rise by on average a modest amount to take account of increased responsibilities.

Service: Non-executives should under normal circumstances serve a total of six years on a board.

Audits: Audit committees should write a full account in the annual report on why an audit firm was selected, and what services apart from auditing were purchased from it.

Accountability: Nomination committees must also account for appointment decisions, including a statement expressing confidence that new non-executives who also hold a number of similar posts have enough time to fulfil their duties thoroughly.

Setting pay: Remuneration committees should comprise at least three members, all of whom should be independent.