Breaking down the boardroom door: New faces from outside the usual club of non-executives would help moderate directors' pay. Jane Simms reports

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The Independent Online
Almost 17 months ago the Cadbury Code on corporate governance suggested that remuneration committees made up of non- executive directors were the solution to the problem of setting executive pay levels. Yet there has been no let-up since then in the number of apparently excessive pay awards to top executives.

Nor is there likely to be, says Ann Simpson, joint managing director of Pensions & Investment Research Consultants, as long as the clubby atmosphere prevails in which directors in effect set each other's pay.

'Most non-executive directors are still board directors of other companies,' she says. 'We will see no brake on pay while this peer- group judgement is perpetuated.'

One of the problems is that companies' thinking in choosing their non-executives is too limited. The 'chums of the chairman' syndrome is dying out, but most companies still choose their non-executives on the basis of who they know.

These are invariably directors of other companies, and if they belong to the ranks of the great and the good then so much the better.

But with companies under pressure to increase their complement of non-executives, the calls on this limited pool of obvious candidates are growing. It is not uncommon for non-executives to hold 15 or even 20 directorships.

This approach is outmoded and dangerous. For a start, the demands on the non-executive have become so onerous and time-consuming that if they are doing the job properly they ought not to be able to handle more than two or three appointments at a time. And according to Sir Adrian Cadbury, business is growing so complex that companies must look outside the traditional hunting grounds of commerce and the City because they no longer hold all the answers to the issues companies face.

'These days companies are having to think of their role in society, their obligations to all their different stakeholders, the international dimension and the ethical and environmental dimensions,' Sir Adrian says.

'You need a broad range of skills and views round the board table to reflect those challenges. And to think that all the ideas are contained within the corporate sector is arrogant and unrealistic.'

He believes companies seeking new non-execs should look to academia, the Civil Service, the public sector and women.

Sir Adrian sits on a number of boards, including that of IBM UK, which also includes Sir John Kinguan, vice-chancellor of Bristol University, and Sir Crispin Tickell, former British Ambassador at the United Nations.

Sir John has a scientific and technical background, and the link with academia and research is invaluable for a technology company like IBM. Sir Crispin, Master of Green College, Oxford, and environmental adviser to Lady Thatcher when she was Prime Minister, was brought on board for his vast experience of environmental issues.

The number of FT-SE 100 companies with remuneration committees has increased from 10 to 41 over the past year. This suggests there has been some attempt to make recruitment of non-executives more professional.

But few companies appear to have adopted the broader remuneration policies advocated by Sir Adrian. One of the reasons must be the reactionary attitude of some of the organisations set up to match companies and non-executives.

Colin St Johnston, managing director of Pro Ned, for example, insists that companies should continue to draw their outside directors from the ranks of other directors because 'it is a highly skilled job that requires expertise in how companies run'.

A more enlightened approach comes from Prowess, an organisation established recently to try to wean companies off their dependence on white males in their fifties and sixties who are public company executives.

Prowess has already won the support of 15 large companies and organisations, including Grand Metropolitan, Kingfisher, Ernst & Young, Norwich Union, the National Health Service and the Department of Employment. A further 25 have expressed interest in sponsoring the scheme.

Jo Cutmore, Prowess's managing director, has been overwhelmed by the level and enthusiasm of the response. 'There's a lot of pent-up demand and potential,' she says. 'Companies are tired of getting the same old view from the same old angle, and they recognise that they need people around the board table to reflect changing concerns and challenges.'

But she warns against tokenism. 'There is no standard spec for a non- executive,' she says. 'The non-traditional profile has to add value. The balance of the board is the thing.'

Prowess's approach is to get companies to identify the skills, expertise and experience they need to drive their business forward. It then helps them to plug any gaps by finding relevant non-executives.

Those people may be main board directors with particular expertise, but are just as likely to be academics or civil servants. 'We encourage companies to take into account all the factors relating to their success - which is not always related to the bottom line,' Ms Cutmore says.

Prowess is particularly keen to promote the idea of hiring lower- level directors from other companies - divisional managing directors, for instance. This benefits not just the 'importer', as Ms Cutmore calls it, but the 'exporter' too. The director will garner a breadth of experience less easy to come by in these days of flatter company structures.

While women can provide the same sort of expertise as men, they can also contribute by virtue of the fact that they are women, Ms Cutmore says. They bring to the party 'everything that is lacking,' she quips. 'Boardrooms desperately need more female attributes.'

Women, she says, tend to be 'non-status conscious, non- confrontational, facilitating, willing to go out on a limb, willing to ask that basic question, willing to think along broader lines, and they have higher ethical standards.'

However, it looks as though Prowess might have a battle on its hands to persuade the more reactionary elements in the City of the wisdom of diversity on the board.

The manager of investment affairs at one of the big shareholder groups says: 'I'd be worried if companies started going for people outside the traditional hunting grounds. If you take the argument to its logical conclusion, you've got lots of intelligent housewives out there who could make equally good non-executives.'

The Cadbury Code has been criticised for its emphasis on the supervisory aspects of the non-executive's role. The committee's brief was, however, the financial aspects of corporate governance. All good companies recognise the equally important contribution to strategic thinking that outside directors can provide. And non-executives with a non-traditional profile can add value on both these counts.

Introducing diversity to the boardroom improves a company's chances of dealing with change and new challenges, and a more balanced board has a more sensible approach to corporate governance issues - including executive pay.

'It's easy to go along with the flow,' Ms Cutmore says. 'But if somebody is prepared to stand up and say 'Excuse me, how are we going to justify this person's pay increase to the press at a time when we are shedding lots of jobs?', it stimulates debate. Then you get a far more open, sensible and accountable situation.'

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