Robert Swannell: the Gordon Brown of the Corporate World?

Stuart Rose is to step down as chairman of Marks and Spencer several months earlier than planned, the retailer recently announced, and will be replaced by current HMV chair, Robert Swannell.

There are expected to be complaints from M&S’s army of loyal small shareholders, most of who appear to be charmed by Rose. The charismatic figure’s bravura AGM performances, where he delivers sparkling discourses on anything from lingerie to luggage, have earned him popularity with many during his two years of leadership, and the executive chairman is “adored” by the small shareholders according to retail analyst Neil Saunders.

Incoming Swannell, meanwhile, is not necessarily the first name that comes to mind for chairman of Marks and Spencer. Sky News City Editor Mark Kleinman believes that Swannell will not be as “high profile” as his predecessor. Saunders likewise commented, “he’s not as big a personality as Sir Stuart,” adding that the veteran investment banker has “a very tough act to follow.”

This has to raise the question, what exactly is the ‘act’ that we demand of any chairman? There are few statutory requirements for the role but the seminal 1992 Cadbury Report takes the view that:

Chairmen are primarily responsible for the working of the board, for its balance of membership ... for ensuring that all relevant issues are on the agenda, and for ensuring that all directors, executive and non-executive alike, are enabled and encouraged to play their full part in its activities ... Chairmen should be able to stand sufficiently well back from the day-to-day running of the business to ensure that their boards are in full control of the company’s affairs and alert to their obligations to shareholders (provision 4.7)

Though we talk of the chairman of the company, his or her role is actually to lead the board of directors. Through effective leadership, the chairman fosters an environment for establishing effective strategies to protect the company and move it forward. And for this, Swannell is well qualified.

Swannell has been an investment banker since joining Schroders in 1977 where he stayed through the takeover by US bank Citigroup in 2000. It was Citigroup that defended M&S against the Green takeover six years ago. Currently, Swannell holds non-executive posts on the boards of British Land and 3i Group as well as chairing FTSE 250 company HMV.

Perhaps it is rash to rain down with pessimistic predictions on the newcomer. Perhaps Swannell isn’t doomed to Brown’s demise simply for his lack of charisma, and, in the role of chairman, expressiveness can be replaced by experience and knowledge shown to outlive novelty.

Unlocking the Code: What do the changes mean for you? Continued...

Here we consider another of the changes appearing the new UK Corporate Governance Code.

Risk Management and Internal Control

A new, clearer statement of a board’s responsibility relating to risk is laid out in Main Principle C.2:

The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

This idea is expounded in provision C.1.2 which states:

The directors should include in the annual report an evaluation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company.

In other words, by setting out in layman’s terms the company’s strategy for generating long term value, a company can illustrate to investors, and other readers of the report, how the board has applied the new principle on risk.

The Code’s publishers, the Financial Reporting Council (FRC) have stated that it was not their intention to “promote particular methodologies for dealing with risk”; boards must merely recognise that it is their responsibility to consider how much risk the company can bear and how willing it should be to take risk on.

It makes sense to include this description in the same part of the annual report as the Business Review. This will not require a major change in reporting practices for most companies. Those that are properly applying the Accounting Standards Board’s voluntary Reporting Statement on the Operating and Financial Review will already be providing this information. See the Reporting Statement for detailed guidance on how this provision can be complied with.

Unlocking the Code: What do the changes mean for you? Continued...

This blog continues to consider the impact of the changes contained in the new UK Corporate Governance Code.

Time Commitment

No minimum time commitment for directors is prescribed by the Code, but the new Main Principle B.3 states:

All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively

Individuals who are non-executives in one company will often be executive directors in another – and vice versa. It is generally thought to be a good thing that an executive gets experience of the workings of another company and another industry.

However, it is important that the demands on the individual are realistic – the Code says that the board should not agree to a full-time executive taking on more than one FTSE 100 company non-executive directorship or the chairmanship of such a company.

A more encompassing guideline is that board members should limit their board memberships consistent with their ability to discharge their responsibilities diligently. More than three to four directorships could be burdensome, and may result in absences at board meetings and a lack of ability and willingness to act quickly in a crisis.

Worth noting on the topic of time commitment, is this comment by Ed Marks, President of Marks Consulting Inc.:

A director’s role in a troubled company is very different from that of a director of a healthy business. The increased emphasis on directors assuming larger roles in managing a company’s affairs means that their responsibilities and time commitments must also increase. Troubled companies require deeper involvement from their boards

Also bear in mind: risks of incurring director liability may rise when the number of board memberships increase beyond a manageable level.

The issue of time commitment links to the new emphasis placed on performance evaluation in the 2010 Code. Part of the appraisal of individual directors should ask the question, are they giving the job the time it requires?

Unlocking the Code: What do the changes mean for you?

The UK Corporate Governance Code, in effect from 29^th June this year, replaced the previous Combined Code. It applies to all companies with a premium listing on the London Stock Exchange regardless of where the company is incorporated. Over the next few blogs, I’ll look at some of the major changes contained in the latest revision and what they might mean, practically, for any particular company, starting with:

Diversity on the Board

The new Code makes explicit for the first time the need for gender equality, and diversity generally, to be taken into account in hiring decisions. Provision B.2 Supporting Principle states:

The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.

Responses to this addition have been plentiful and various. Regardless of whether you believe this advice should or should not have appeared in the Code, the fact remains that, at present, only 10% of directors in Britain’s top 100 companies are women, and 25 of these top firms have no women board members at all: shareholders and other readers of the Code are going to ask questions of under representative boards.

Because the new requirement is phrased as a principle, not a provision, companies will not be forced to explain publicly the absence of women directors. This is not tantamount to a get-out or loophole; instead, it means that companies have the time to work on building a diverse board membership. There is no pressure to appoint new directors purely for their contribution to gender or ethnic diversity (as the IOD pessimistically predicts: http://www.continuitycentral.com/news05179.html).

Boards skewed towards the white, British male should take action now to amend their nomination committees’ processes. Descriptions of the role and capabilities required for a particular appointment should be carefully prepared, open advertising employed and/or an external search consultancy engaged in the recruitment process. If these behaviours become established and well-used, diversity will be a natural outcome. Take care of your nomination procedures and board diversity will take care of itself.

A closer look at the board review process...

What are our directors bringing to the (board) table?

Having considered the foundational issue of who should carry out the review, and established the underlying governance structure, we turn to the question...

What does a board review involve for individual directors?

Within the broader review of the entire board (to be discussed later), the contributions of each director must be assessed.

Many director appraisals are currently conducted in an informal way, with the chairman personally assessing each director’s performance and commenting privately to the director involved. But the pressure is on for director appraisals to be more formalised. A board policy decision, with the full support of all the directors, is needed to introduce such a process.

With the support of board members obtained, the next step is to clarify the criteria to be used for the evaluation. The chairman should outline the purpose and process of the assessment. Desirable director attributes and core competencies can provide a pro forma for the individual appraisal. The chairman’s statement laying out expectations of time commitment, skills, specific expertise and experience provided at a new director’s appointment, should be revisited, especially in light of any changes in the company’s strategic situation.

In a formalised director performance review, the data collection stage follows. This might involve interviewing each director to discuss their experiences as members of both the main board and any committees. Information is also obtained by analysing attendance records, and board and board committee minutes, looking for innovative contributions to discussions and decisions.

Sometimes peer-review techniques can add value to the process. Taking this further, a 360 approach could be beneficial, involving too the opinions of external auditors, institutional investors and company staff who have come into contact with the director.

Following the data gathering, a confidential report to the chairman will be drafted. Given the personal nature of the report, most chairmen will discuss the relevant portion with each director one-to-one. The discussion should cover a strategy for further personal development activities, such as committee leadership or membership on other boards.

Adopting an annual routine of director evaluation not only ensures compliance with many codes and listing rules, but is as vital for healthy governance as are long established executive appraisal systems for healthy management.

‘Comply or Explain’ at its best

Dramatic reactions to new guidelines that require the annual re-election of board members has hit the news today. The FT reports how three of the UK’s biggest investors have written to 700 companies to encourage them to “ignore” the provision in the 2010 Corporate Governance Code.

The paper’s wording is, however, perhaps unhelpful. Colin Melvin, Chief Executive of Hermes Equity Ownership Services – one of the companies involved in the letter sending – said he was encouraging companies to practise their rights and “explain” rather than comply. This is quite different to ignoring the provision altogether and, aside from whether director election practices should or should not be changed, the situation highlights the advantage of the UK Code.

If Corporate Governance in the UK resembled the US system, where legislation rather than codes of best practice constitutes the main determiner of corporate behaviour, today’s story would read quite differently. Large companies would be forced to undergo an upheaval in the foundational area of director election, to the displeasure of their major investors, or else risk expensive and hugely damaging legal action if they resisted the measures.

As it is, under the UK Code’s trademark “comply or explain” approach (see pp. 4-5 http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/UK%20Corp%20Gov%20Code%20June%202010.pdf), the outcome of the FRC’s provision is positive despite being ill-received by some. While Legal and General and Fidelity welcome the new guidelines, the FRC has been forced to closely re-examine provision B.7.1 and defend its value to big names like Hermes, Railpen and the Universities Superannuation Scheme who oppose the measure and have laid out their reasoning to hundreds of FTSE 350 companies. In turn, if these companies choose to reject the Code’s call, they will explain their stance carefully to shareholders in the Annual Report. The atmosphere is one of rigorous dialogue and well-considered progress.

In the ever-changing, multi-faceted and oftentimes ethically equivocal realm of corporate governance, this is exactly the culture of intelligent exchange that is needed and that is fostered by the “comply or explain” approach. In the best practice system, power is placed not in the hands of central government or the judiciary, but where it belongs, in the hands of boards and, ultimately, shareholders.

Blunders at Buncefield? Explosive, expensive... inexcusable?

In the last few days the Crown Court ordered five companies to pay almost £10m in combined fines for their part in the Buncefield explosion five years ago. Gordon MacDonald of the Health and Safety Executive concluded his comments to the press by highlighting the corporate governance, namely risk assessment, issues that the case raises:

From the boardroom down, companies must ask themselves these questions: ‘Do we understand what could go wrong? Do we know what are our systems are to prevent this happening? Are we getting the right information to ensure us that these systems are working effectively?’” (http://www.bbc.co.uk/news/uk-england-10660356)

It is clear that the ‘boardroom down’ control activities of energy giant Total, as well as well as local firm Hertfordshire Oil Storage Limited, were deficient. The standard of risk assessment systems and, specifically, the implementation of COMAH (Control Of Major Accident Hazard) regulations within the companies must be scrutinised for fundamental corporate risk assessment features, such as:

• clear objectives communicated to employees on risk assessment and control issues
• significant internal and external operational, financial, compliance and other risks identified and assessed on an ongoing basis
• a clear understanding by management and others on what risks are acceptable to the board
• clear strategies and policies for dealing with risks identified
• a prevailing company culture, reflected in the code of conduct, human resource policies and performance reward systems, that supports the business objectives, risk management and internal control system
• a co-ordinated effort by different parts of the company on decisions and actions

Only by addressing these areas can Total’s Lee Young’s comments that “this was an unprecedented incident from which we and the industry have learnt many lessons” be ratified.