The British Financial Reporting Council has just released an updated version of the corporate governance code. The new Code recommends “in the interests of greater accountability”, that all directors of FTSE 350 companies shoulder-elected by the shareholders each year at the AGM.
As with all other provisions of the Code, companies are free to explain rather than comply if they believe that their existing arrangements ensure board effectiveness, or that they need a transitional period before they introduce annual re-election.
This provision sits uneasily alongside the provision that requires directors to be appointed for a specified term and for there to be an especially rigorous explanation of any term beyond six years. It is obviously not intended that, as in some not-for-profit boards, the board is to be substantially changed each year. It is also at odds with the provision that states (and we should all agree) that the nomination committee nomination committee should evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.
It is very difficult in a fast moving commercial environment to find people with the specified skills and experience that also have a vacant slot in their portfolio of board seats at the time when you need to fill your board vacancy. Having found such a person it is a relief when the shareholders ratify the appointment at the next AGM. Although it is rare for shareholders to overturn the recommendation of the board there is always the chance that this may be one of those rare occasions. Boards work (or should work) at the strategic level and they need time to impact the company culture and implement strategic changes. To attempt to provide this high level input in a short time-frame (and one year is perilously short) and have noticeable results to ensure being voted in again at the next AGM is an impossible task. At worst it will lead to a rash of short term initiatives that could weaken the company in the long term (such as cutting back on training and R&D) and at best it will lead to more time at AGMs being wasted with matters of form rather than issues of substance.
The boards of smaller companies are also encouraged to consider their policy on director re-election. Presumably with the idea that they too might benefit from a complete loss of corporate knowledge or an unbalancing of the carefully built skills set available on their boards.
This recommendation is a disaster. It shows that the code-writers have no respect for the value of a skilled board team that acts on strategic long-term issues. Let’s all hope that the FTSE 350 companies opt to explain rather than comply.
What do you think?
Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.