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    of 7
    08" Corporate Governance company, but in the sens of the amour of it that iy available to the shareholders. A company may well ereate wealth but choose (© pass it 08 10 to the customer. necepting lover prices and lower returns So us so achieve market share arid growth, Such a choice is fess common in the Acigiophone countries where firms have to worry bout their institutional shareholders and the dividends they ate paid Today's market share is 1 be tomorrow's prot and market dom nee. and we would expect 10 see's greater weighting of German and __Tapanese companies in the top 800 by the turn of the century, as British companies are not only overtaken but as the Sharehokder value con tlomeratés and those companies dominated by one or tivo people break up. With a greater weightof non-Anglaphone companies we would also expects respondingly greater weight being given to their national ideas of ‘We should expect the top companies, in The Times to0 oF the Fortune 500, tohavea shelflife of pethapsrmo more than go to 50 years at most. There weil be many casualties before the year 2000, Readers should steel therm- elves to see casualties among clearing banks, building societies and con- sglomerates. Whole sectors will change: the chemical sector, for instance, wil have to contract under the impact of over-capacty, ageing plants and eaviconmental pressures; there wll be fewer plants znd fewer companies We have already alluded to the all pervasiveness of change and of sur ping change. Tn this book we can only make 2 few informed guesses perhaps the biggest Surprises of all wil be in areas we neves thought off In uch a world a copnpany needs all the friends it can gst. A wider word of stakeholders, alliances and corporate networking is nota luxury, itis plain commonscase and a business necessity io EXCELLENCE IN GOVERNANCE THE NEED FOR BOARDROOM EFEECTIVENESS . siccessfl in all areas: marketing. “The successful company seeks, to be successfel marketing ree one production, RED and 30 on, 20d ithas © eels Rowe 9 gperations, prottaberiag. The boerdroom is not exemat fom eis ol vii dnp Te has to be as effective af any other area, and the Tesora: cuhether executive or not, has to add value —— se norperformiag board can cripel a company just a8 Surly 8 pectonningSosnes area ox produ: rage, Inout experience thre 8 10 deadly sins of non-performing boards: {The board is wrongly trusted coud be foo big. in WEA PAE jut a talking shop, of these could be a wrong balanes DST CE soe aa rexecnriverespansbitiesand she others here could 6S soo many exeentive directors, they could all be-business A562 tromagers with their ox turf € protect and s9 Om, ae Ga) Tatonmation, particularly Bnacia formation. inadeaua's 2m nothing s done abou ths. cet i (ii) Major decisions, such as bet your company azcitionsor disposals are con without chellenge or with inadequate debate, or BY SPS the board: (fv) . .- and then theré are no post mortems 19 s68 the decisions wer correct ot not soar (9) Teboard doesnot push managementhard on susieeston ONSEN, Gnetuting taining), R&D, productormarker develOpeert (i) The company's financing arcengementsare nor keptander oT cyrong banks, too many Banks, the wrongmeans of inane, ron bred the ong Se PoE Se naes ¢ and unpleasant (but (vit) This a “yeseman’ board that will not take necessary) decisions te Gully and that is, in fact, under the dominariin of a 2-8 cf person or influence. fix) ‘Phe poard meetings are social occasions, over @ gO" TET Trcsgqaate tive for discussion. and a rubber stamping OF A8SS 97 god tunch. ith oS Corporate Governance 7 (x) Thoee isno evidence of say rigorous review. such agthe non-existence “ejmathy expect he fo soso be separate, and, wat MOH IPO of audit or emoluments committees. of. if these exist, they aré aot reap be leary dened. iis the charmer’ job co ensace Hat Te taken serious : for boards) work effectively and add value to the Compa cis his or er Jobe ensuce tha theres the ight Pane between ese directors an tar the lated Bit into the boaid. and add 10 t, and vamme to ensure that they understand What we are suggesting is that companies carry out —oF cause to be carried. gut — a regular aafual boardroom audit. to ensure that their board is tffective and is adding value to the company. Much as they may hate it, the directors should not be spaced from the requirement to justify themselves and their performance. tess tnt pot the or planar ona pt pation the sompty i a reo noe cont, they sould mot 28 a peg ne osc That evasion a0 pa theehras eae tings, 0. ts ce : cent kop vale ie and red 0 De Bee eng spo she ian © Sn prope ode 5 rte crmpary a quston)Beveen NES tere coven te seni, ge ie Be OF PADS tooth pot enphanizon tenner veIOPEID EST se cps ae cies © Ale 2 CONES, ayer of he come eager eso a ey ae om te bow Seer ogo hrfore one of ede and iow STE wee amar ne cgan and vowel be gene TS areas i gr a onexcatire! enema: HY Derg so se oon false and canna be SES! pareime et even ay the yea, 2g ou 687 oe sien a 0 0 ren’ ole beens iss an escent sen eon ee Hacompat ba he OE AS hn 2 neo i nseig the bone I oF 2 pony. i sob propery WOMENS heron ang 280 ‘This chapter sets out the basis for such an audit. and i particularly relevant to the medium-sized and smaller company. whose board perhaps ‘srew up like Topsy, and which now therefore neeils co look expecially hard at how itis govemed. We would also emphasise that we are looking at the board as a whole, and are making no distinction between different types of Sirector, be they executive, independent, non-executive or parttime. They are all part of the governance audit. ‘We are, of course, looking at the situation 2s tis, not as we would Iikeitto be, We have to accept the unitary board structuze in today’s public com- pany, the current state of the law, the fact that in some companies the chairman and CEO are one and the same person. The focus is on practical ‘ways of improvement. In any case many of these companies will aot be public companies and would therefore be excluded, under our definition, from the eventual requirement to set up formal supervisory councils. They would, however, we are sure, want to include the supervisory concept in their governance. ctor. A passive chairman 2 used RRB Na THE CHAIRMAN ‘The chairman is the key, and though technically @ chairman is only the chairman of the board, we are taking the role in the poplar sense of the understanding to mean the chairman of the company ‘There is no template, 2s it were, for the ideal chairman for all circum stances: the focus of the job depends on the times and the company’s state of development. One thing is certain, however: chairmen must have a view of : THE BOARDROOM AUDIT ‘ Why have 2 boardrooin audit? sectors it is true, but there are 218021109 they want to g0, both for the company and for the sole of the board “Thece are many good boards of directors, iis true, DUET SEITE within it seer fad ones asthe events of te last fer yearshave shown =t eg In the long term our view is clear: the supervisory structure will auto- many Raremedinere ome. Both the bad and tnemedioere we TET TE inatically separate he job ofthe chairman from that of the CEO in public eeational economy at 2 ‘ime of inereasing interoation®! TOT? i mmanagement, Standards companies. Until the law is changed, however, some companies may well ceunecy ncede the highest standards of boardroom mane : 100 low in too man’ uublic companies. A proper ewould are still renognised as bet — sso Corporate Governasee curvcture of governance i Se cass way’ of improving seas, and he see Ocha the spose ode Ce ot go aay ei bens ae 3 corte ree mented ane wnien aibost and tesated for. Companies ae 2 ‘cannot fut fake 60 ue the danger is thatif they do mot. they will be 33 \ sarah nto it by. regulation and lave There & widespread publis concern == forced dhe standard of governance. Medium-sized and smaller companies aoe escape by reasoa oftheir sige. While they cannot afford the ivest= rent in governance thatthe majors have made. they To0 wil have fo give aa otal consideration tothe topic. They willbe under scrutiny and the : thalty and operation of heirboards willbe under review: There hes been & Tadeney by some companies to regard governance asa matter of window hewsing, to please the Sutside word. Nothing could be ferther fom real the, and ve believe componies will make a great mistake if they do not ake the subject ceriously. The days of a bland board mecting over a gourmet lhnch ae sapidy disappearing for most public companies, just asthe days of the business lanch itself have vanished in such companies. “we are not merely cefercng 1 social pressures, which re alo becorting ove insisent: legal obligations, too, are making it increasingly important ee diccators to be aware of the law and ther postion with regard to it The penalties are getting more serious. Directors will need to be beter caine eer the job, and they will increasingly be expected fo possess the requisite beardicom skis. The standards of the average will have tobe raised So wharis tobe done? We in Britain end to be somewhat impasient with congentation andstructares, lying on the tradition ofthe biliant amateur Bree comrde and their directors have to be professional inthis competitive vvotld: they have to be properly selected, positioned and” organised, in a weit shought-out framework, and they have (o be trained and informed. (n Sher words, companies must give the same careful thought to their Comdcoom structure as they give to any other organisational structure, To help them we setout an approach in this chapter inthe form ofa boardroom meh so that they can measure themselves against the best practice we have deen discnssing throughout thisbook. We would hope that the majors would pave much of the structure in positon: our message is to the smaller companies who are looking for excellence in governance stage? Shareheldors management figure 10.1 The boardroom review programme ‘The boardroom review Fof the boardeem review, The ae dusieman, Figuie 10.1 sets out an overview OF ES boards n |A boardroom review and its subsequent implementation cannot susceed poardroom review has the following goals: Galen it is carried ut at the very highest level by the most experienced peactidaners. This ton potitical a sebjestt be endertaken internally, rom Baia the firm. [has to be carried out by outsiders working for the f ce against tes business {i) Tomeasure the company’s struct {governance apne ojctives and co ensure that it Ras the Teh seructure for its aia Corporate Goversance on ard circus se ture: it depenkis on the time and the situation. {gay Te ere that te boards) se (have) the ae balance Gi) To ensure thot she strocate of governance conforms NE only with the: egal and regustony cequirements, but (§ a9 18 accord with best practice (jv) To plan boardroom development in accordance vith the foreseen, development of laws and regulations: (u) Above all o-make sue shat the whole structure of governents, present fod planned, is in the best interests of the company and its stakeholders, “There are three important points 6 be made at the outset 6) ft is no gecident that the (ramework i seilar co that of & classical eategicrevie: thisisastrategicreview, ands cbjectivess to mProve the company’s performance. (i) The review covers the whole board with no distinesion between direc: tore with executive posts in the company ard those with none- ‘There is no purpose in having a review unless the outbome {s su sotion. A review by itself achieves nothing, and is only a means fo 22 end. “There are three stages to such a boardzoom review, oF audit 26115 SOE” Trice called, the company position, the options and the implementaor plan, which are all discussed below. “The company position Fee ea rare plan the fos stage has fo bean objective To0k at he company's poston eee point wil be the company’s objectives and goals, and it 2 cnn etna review is canes ont in the shadow ofthese, There 50 sere intoksng atthe boardroom tastre and governance fhe SPT arn agendseess, without droion and without goa: the YeadersiP wg fue il hee to be ried before anything is can be done ane a er objectives have ean speifeiplcatons for governanes as isshowa in Figure (0.2 Fa would ftw a fogical progression: the mizsion and jects ee ry Morting pint, and there woul ead 02 consideration of ie ro oe utr the nes of re ganization stacre he sel Foe rae ap and hilt, the Sang cequiement and son, TNE 0" (ei hese factors would begin to give pointers a 0 the owes 9.2 Corporate objectives ard a shen be projected 1d skills are require ements, what 608 required. These would) e plans: what struct ce, what financing real expertise and adviet light of the corporat what boadroom balsae verational coversgs “The analysis of sult ia 2 template, poardroora structure again gizectorate, fo thinkin ives and plans ensure the com ts as brought ou’ as it were, t0 st_tishelpful 2 this the three components: he advisers, that ist 5; and the stakehold she success of the b sated in terms of the ‘executives, that is tig those with 8 com jedge or relation eine ‘As in any strates land ihe outside world. ig of which are sb looks at the current bo: wn, and itsimpact 08 R&D (os a Germas the management team ig there an axel position is eval “The first part is the inter :0.3. The internat of skills and contacts, ianpact on the com ‘What is the relations! we a grip on a 2 The review sould examine the working would map out “The focus on enol che company. Does it sre board appeat git and controls ( the board with on employees, 006 Gifferent svbsi 4 Corporate Governance vat corporate aso we Sone corals weer 1 mee re he Governance a cone versace | | resent, E ae fn Biuatiod Th ‘Susiaay Te genen'| | meanien ean fam end arorty Sraveralcers Figure 10.3 The internal review ignifcant in view of the likely trends of developments in EC Directives. Britain might have been a lone dissenting voice at the EC’s Maastricht meeting at the end of r99r, but in the long run Britain, we are sure, has no cother option but to be carried along by the tide of EC developments. Employee influence and empioyee participation in companies will row. Everything would need to be looked at, from the way the different relationships aad spheres of influence weré delineated (an important poiat) to the actual form of board mectings: what is discussed, is there enough time, is the documentation sufficient? ‘Such a review looks at very sensitive and deticate areas, some of which are often regarded as no-go areas by companies. We make no apologies for this: companies that are frightened to take a hard fook at how they are run at the ‘very top evel do rot deserve to succeed. “The outside viewis just asimportant, and, in our experience, just asrarely looked at. We have illustrated this in Figure 10.4. Even if a company were not carrying out a boardroom review the information gethered together in the ovtside review is important by itself heeause of the inspact the different pressure points can have on the company. Merely 10 roview the stakeholders isan important exercisein tsoun Fight Who are they, what is their interest. how does this interest manifest itself, howean it he harnessed to help the company? The definition of stakeholders should he as wide as possible. going so far as to inchide the company's sebagiavest Sota ‘i resceltenceia Governance 218 Stakeholders Penner ‘Shareholders Pine vere ho are 7? Tetons Correataties Conger shoe *Consares ett Serna term corsirations he company aspects Station The finanetat wer To are they? Sinfuence on shareholders View of company -Powerte intense Figure 10.4. The outside review : swell: some cO™- siocers, The financial world needs to be reviewed a6 we oe ke a cavalier attitude to the financial worid; most reir progress. The financial world's impact yer and their progress. The mpeet panies can afford to ta realise its nfiuence on th seas tect felt inthe areas of reporting and Gnancial(ransparensY, ade back to audit and emoluments committees eee Yeas ack aasanoes also need to be reviewed and in the wore of auatntey networks a partnership coview isan essential part of any SE tiudy, Many companies Keep constartly updated files on Po wernanents, IME potential partners. The whole relationship with gov ies a pore riies and, increasingly, tne EC, isa vital ares the eomesny TN aang, plan and organize itself for. ‘There is an inetasing UN worry toentice employ former EC senior bureaucrats as well as (017 Cornmissianers on to the board. : “the regulatory question has been » constant topic o comment Dy 1S pL ererton: the pressures are g70W7 | Corporate Governance omparies need to be aware of the Te tort hereeves against uch pressures, whether ley oF 97) ne Comision, One chieman iol us that hile othumb wate spenizagee of the Directives pasted by the Commision, and hen 0 BASE oa ge each country in Tne with that county's historical cate of speed in implementing EC Directives ett of fe eternal and ouside reviews wil be a starement of the compaay’s postion on goverrance inthe ight of ts objerives, This Se eek Ser etnaiea! strengths. weaknesses, opportunities and threats SOT) ins athe form of option, priorities and time scales fraction, The fois fegovernance for competitive edge The options and action (stages 2 arcd 3) Gprions are easier to deal wit ia che classical seategy eview Han it & cenroom audit. Inthe former case itisup tothe opmanagement toceeide mateo do inthe Fight ofits resources. In a governance feview the options age may face the chairman and chief exceutive with some unpelaa2i¢ Seon partieularly if it emerges thet they bave the wrong structure 0: 89 snadequate board. This cannot be fudged, however: whether the isue & ace ove ora regulatory one, action has tobe taken, and itis up to the chairman and the CEO to take it. aircon programme should be seen a8 one of the Key aspects of corporate stetegy and ofthe strategic plan. The responsibility is the chait= tran’s, and will cover a range of topics: : ) The biggest gapis often that ofthe succession roche chelsmal himself! Tea andin companies as ar aparts the French BSN and she British cersrro. itis the area that the shareholders az often most concerned spout “There are other aspects too: the present board may beexcellent, but what about board renewal? Are neve people being brought up £0 replace the present board in time? This isa question that concems 6% sre mejor companies such as ICI, who have the potential board ppointees availabe but woul like to give them experience on Pie boards to train them. The question is, Row? {i) Reeruitment and training have to be fooked at, Directors of a public company need to be not just professional accountants, engines 0” personnel managers, but also professional directors. tnereasing'y hey Pil need specif training to enable them (0 fill the role of directors. Gi) Bos Committees must be considered. But this is not just @ Gquetion of forming » committee and hoping forthe best, Commies sae rermasof reference. and those Comenjtrees in the spotlight such aS Hq Excellence ia Governance 207 wy must have their ceationships if ¢ officers clearly the and ~ the Bpgernal and exterat tudtors and COMPAS ' established. ne that there have 1@ PS demonstrably good finan es without sayin i up such 2 comatittee controls t0 Bas sion programme must be swell tought through. and needs to deal ceLeriareeia® muneration 29d wth, policies and rotes. job descipHons ‘and back-up. Tem wi Pe ac ie drectorare wilds value, CSE nin Mare vision, the bond struetore vil De CBE EAS foe ing that won aaron te Ray elements of #0 eapementato” programe in Figure 105. Training implementation proxamne oad development “eoan ecratment “Board tsiniog ecard coments TOrgaisation seus Subs boards igure 10s Sage 3 ~ implementation PrOEroMS wradays, and there a6 iredtors is a very fashionable topic 1 a0 eaitable. (tS NOt OUT FTE 10 vit ourselves to 2 general elements 89 such ‘Training for a alveady a large number of specialised £0 n this book. We shail Ur training needs. There are three eominiesit GF these in discussion of directors training for dire ‘The first s fort diwntor, Directors n2ed to understand wh 1 job of being? lege! in the technical aspects of vat the job encais, SHAE tity is and under which faws. Inshe UE this means i et understand the provisions of the relevant Companies Acts (which Sot {ine aned are amended withthe passage of nie) and the Key points of fine what they need to do with regard to the accounts thei esponstbiti * the directors’ eeport in the annual aiccounts, ihe insider trading provisions. ' ae es eat trade inthe company’s shases, and soon. They need to know verre the Insolvency Act 1986 ad the Company Directors Disqualifiation aaa ig¥, They shouldbe advised as to what indemnity insurance they need totake out : cot Sirectors need also to be aware ofthe way directors’ meetings should be conducted and what is expected of them at such meetings the cole of the aorejerandur and articles of axodiation. and the inf]rmation they have fO give to the authorities and which authorities. “The above is general information which can be obtained from general courses, ‘The second aspect of their training is specifi to the company in seston and it is up to companies to ensure that they give it and co the GeSerors that they ask for and receive it, This information is basically a potted coursoin the company the director is joining and would cover: () Theiejob description (i.e. whatis required of them and how they willbe judged), whichis absolutely essential, but alas not very common, in che case of outside directors. {a) Tnformation on the company background, te organisation, producss, results, straxegies, polices, culture, people. There is no quick way of {Going this and it cannot be done by means of documentation afore. The directors in question, especially if they are outside directors, have 10 be posed to the company, go round it and meet people (and nos only the mnost senior people). There is thus a considerable amount of work to be done when a director is appointed, especially if appointed from outside. (iii) Many companies use their regular board me ings as the occasion for a function or business unit to make presentation so that the outside directors in particular can extend their knowledge of the company. Grand Metropolitan and BP are typical of organisations that also hold their board meetings in different locetions~ not all of them in the UK — for the same reason “the third aspect of training isthe persimal responsibility of the director in question, Inside directors will be presumed to know and to understand their company in depth, but ousiders come in without such knowledge. They will eed 10 establish very clearly what is expected of them, who they wall report “onium ei perornanee i ej. seu sae EE stint renunerton i Riemer ome es se eee i toe he ees fe OTT shot hee es rege rv shareholding. There ate maki accounts, fs stand eee the analysts views, media comments. the 7 shy.number of databases avaiable to make tat investigation sn e206 aaa are als technicalities tke account OF, SHAE costing hs ‘new director has provided a written consent roactas dzector, which S70 required under UK law. and wo enquire ‘whether any "directors and of dnctarance Hag to be armerded in the Light of the eX) appeiniment ee ‘On appointment, the director cushion sm tegie statements, the regular men oe st wa te comparison agaeatte budget and Ne sot sear elias the board minates. Most fall the new appease tee are along dieussion with te chairman f0 66° feel for & boardroom cult and requirements WHAT 1s $0 IMPORTANT ABOUT GOVERNANCE ccmmanie not a mace nsjorsnnaia ON TOS Gove ee nota ee aot ot aoe a oe ung ed ey ale HE inn ey aes emt fo Te noe wus werent non overane NN E coast me cones ee

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