Why do Boards fail?

Reflecting on some spectacular corporate governance failures, Bridget Biggar argues that it is time to put boards under the same performance criteria as other management teams

A litany of recent corporate governance failures suggest that there appears to be a problem with how many of the largest businesses are run - Kraft’s botched takeover of Cadbury’s, the Prudential’s failed bid for AIG at a cost of $450m, BA’s failure to deal with a longstanding employee relations issue, BP’s failure to deal with the biggest ever environmental disaster in North America, and the meltdown of the financial system.

The common theme that underpins these corporate fiascos is a failure of corporate governance controls. It’s becoming evident that something needs to change.

With recent corporate behaviours looking anything but responsible or sustainable, many chief executives, especially in the banking world, recognised they need to rebuild trust and restore confidence in their businesses. While there have been changes in a number of chairman and CEO roles in the financial services sector, notably at Royal Bank of Scotland and Northern Rock, there has not been a significant shake up in board membership across industry.

In a withering attack, a New York commentator described UK boards as the most incestuous in the developed world. While the criticism might be overdone, it is perhaps surprising that we haven’t seen a greater shake-up of board level appointments in the last year. In a McKinsey survey released in Spring 2010, out of 186 directors questioned, only half thought their boards had met the corporate stress test of the downturn. In other words there is a fundamental lack of faith on the part of executives who have to run the business in the non-executives who are supposed to steward the business.

At the heart of the problem, there appears to be a tendency to reward well deserving colleagues and acquaintances with a seat on the board without scrutinising whether they are the right people for the job. The government tried to encourage a shake-up of boardrooms when it launched the Higgs Review in 2002. Higgs advised there needed to be greater representation of all aspects of commercial life in the boardrooms and to draw on a much bigger talent pool. The impression is that fundamental change to board make-up (e.g. more women, more ethnic minorities etc) is not happening.

The Financial Reporting Council (FRC) has recently undertaken a review of corporate standards for listed companies and it published its recommendations in May. It had four clear recommendations for board members:

  • To increase accountability, all directors of FTSE 350 companies should be put forward for re-election every year.
  • To promote proper debate in the boardroom, there are new principles for the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
  • To encourage boards to be well balanced and avoid groupthink, there are new principles for the composition and selection of the board, including the need to appoint members on merit, against objective criteria, and with due regard for the benefits of diversity, including gender diversity.
  • To help enhance the board’s performance and awareness of its strengths and weaknesses, the chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.

These are eminently sensible guidelines but long overdue. Some recent examples such as Prudential’s failed AIG bid and BA's long simmering industrial relations problem appear to be subject to what the FRC calls groupthink. In other words, there’s been a lack of voice amongst boards to properly challenge and hold account the executive on its strategy.

Surely, it has to be the case that if management is subject to performance reviews, it’s important to know the board is fit for purpose as well, particularly in times of crisis. Great talent can be brought in to an organisation and add great value, but the FRC’s report infers that all too often board members are not being appointed based on the right criteria - in other words is a pharmaceutical boss the best candidate for the chairmanship of a bank? And if he is the right man for the job, how can his board be judged on performance without some formal review or assessment? Without the board being assessed, it’s difficult to understand how they can then make a judgement about the performance of a management team.

Leadership is fundamental to the success of a business and successful leadership comes from the top. The board cannot expect senior management to improve its game, especially in these economically challenging times, without first asking itself some searching questions.

Bridget Biggar is director of HR at consulting firm Management Intelligence.

For more information, videos and advice for SMEs, visit www.freshbusinessthinking.com

Start your day with The Independent, sign up for daily news emails
News
The guide, since withdrawn, used illustrations and text to help people understand the court process (Getty)
newsMinistry of Justice gets law 'terribly wrong' in its guide to courts
News
Bobbi Kristina Brown with her mother Whitney Houston in 2011
people
News
Starting the day with a three-egg omelette could make people more charitable, according to new research
scienceFeed someone a big omelette, and they may give twice as much, thanks to a compound in the eggs
News
Top Gun actor Val Kilmer lost his small claims court battle in Van Nuys with the landlord of his Malibu mansion to get back his deposit after wallpapering over the kitchen cabinets
people
PROMOTED VIDEO
News
The actress Geraldine McEwan was perhaps best known for playing Agatha Christie's detective, Miss Marple (Rex)
peopleShe won a Bafta in 1991 for her role in Oranges Are Not The Only Fruit
News
newsPatrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
News
Robert Fraser, aka Groovy Bob
peopleA new show honours Robert Fraser, one of the era's forgotten players
Life and Style
Torsten Sherwood's Noook is a simple construction toy for creating mini-architecture
tech
Sport
David Silva celebrates with Sergio Aguero after equalising against Chelsea
footballChelsea 1 Manchester City 1
News
i100
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links