Controlling pay, greater diversity and stronger risk management are the new priorities, says our guest columnist
This year marks the 20th anniversary of the Cadbury report – Sir Adrian Cadbury's 1992 document that set guidelines for good corporate governance.
The report has been updated many times since: the combined code, the stewardship code and, more recently, the EU green paper on corporate governance are just three new takes on best-practice recommendations for corporate governance. These changes are due in part to scandals such as Enron and Madoff, and latterly in response to the global financial crisis.
Yet many board members would argue that – outside financial services – intervention has not led to much improvement. One area where there has been meaningful activity is the greater engagement of shareholders and other stakeholders in the corporate governance of companies in which they invest or have an interest.
So far this year we have witnessed more scrutiny in the boardroom, not least over executive pay and the link to performance. The stepping down of chief executives at AstraZeneca, Aviva and Trinity Mirror Group showed the sharper focus and growing influence of investors on the accountability and responsibility of the board linked to performance, and in some cases the corporate behaviour of companies in their charge.
We are seeing investors – such as pension funds and fund management groups – asking for more evidence of good governance from investee companies. Last December, Legal & General Investment Management announced a policy of investing in companies with a proven approach to boardroom diversity, driven by a belief that greater variance means improved decision-making and a better-run company.
Gender diversity will continue to attract attention as boards attempt to achieve the targets set by Lord Davies in his review of February last year. Boards and investors must be convinced that more diversity can add value. It is vital that boards strive to improve their skills, experience and perspective to avoid group-think while balancing this with the need for directors who can commit the time, understand the business and bring new insights into finance, technology and risk management.
The rest of this year could see many boards conducting reviews of their risk management processes. The woes of News International may well lead to more companies extending oversight of risk management to include corporate culture and reputation rather than just operational concerns. Many boards are also taking a longer-term view of their management of leadership risk, working with consultants to develop succession planning strategies.
Corporate governance is higher on the agenda today than it was 20 years ago. Companies must adopt a more progressive approach, achieving the right balance and culture in the boardroom and improving their risk management procedures as the centrepiece for good governance.
Richard Emerton is head of the board practice at Korn/Ferry Whitehead Mann
