A review commissioned by the Department of Business, Energy and Industrial Strategy (BEIS) has recommended improvements to the way in which independent board evaluations are carried out in the UK listed sector
It was carried out by the Chartered Governance Institute, and was prompted by a series of high profile corporate failures, including the collapse of Carillion, which raised questions about the role of directors, non executives and others.
Peter Swabey, policy and research director at the Institute, said: ‘The primary purpose of regular board performance reviews is to help the board continuously to improve both its own performance and the performance of the company.
‘Engaging an independent reviewer can bring greater objectivity and fresh insights to the process. It can also provide some reassurance to the company’s stakeholders that the company takes its responsibility for continuous improvement seriously.’
Commenting on the review’s findings, Sara Drake, chief executive of the Chartered Governance Institute, said: ‘While there is no evidence to suggest that there is widespread market failure that needs to be corrected, we believe that there is scope for broader adoption of good practice and greater transparency on the part of both board reviewers and the companies using their services.
‘It is for BEIS to decide what action to take as a result of our report, but we believe that those objectives should be pursued through voluntary initiatives, with appropriate encouragement from BEIS and the Financial Reporting Council (FRC).’
The Institute has now published a voluntary code of practice and good practice principles, designed to encourage greater transparency about how external board reviewers conduct reviews and what their qualifications for doing so are, and to help to prevent conflict of interest and drive good practice.
The voluntary code of practice for providers of external board performance reviews to FTSE 350 companies is based around four broad topics: competence and capacity; independence and integrity; client engagements and client disclosure.
Reviewers are asked to commit publicly to the standards in the code by becoming signatories, and companies are encouraged to apply the voluntary good practice principles for listed companies when engaging an external board reviewer.
In addition, the Institute has issued guidance for listed companies when reporting on their annual board performance review, to assist with their reporting obligations under the UK corporate governance code.
Swabey pointed out that the support that is needed by one board may be very different from that needed by another, and that excess prescription could deter innovation and competition, so while the code identifies some elements of what would be widely viewed as good practice, these are not mandated.
‘That said, it is legitimate for shareholders and others to expect greater accountability from both companies and reviewers as to how board reviews are conducted, and evidence that they are being undertaken robustly. Evaluating the board’s effectiveness may not be an exact science, but nor should it be a black box,’ he said.
Lord Callanan, minister for corporate responsibility, said the government is committed to learning lessons from previous collapses, and will consider the report’s recommendations carefully, setting out more details on next steps at a later date.
The report was also welcomed by Maureen Beresford, head of corporate governance at the FRC, who said: ‘The FRC’s recent review of corporate governance reporting identified that many companies could improve their disclosures and highlighted areas for improvement. This is a welcome review and its recommendations should be considered carefully.’