In yesterday's FT, Hugh Willmott offered his view of the Tesco situation. He comments on the apparent dereliction of the NEDs but his analysis misses two points that I have written about before.
Firstly, the Tesco board structure. The company has a board made up of NEDs, the group CEO and the CFO. It also has an executive committee, which comprises all the senior executive directors plus the CEO and the CFO. The diagram showing the committee structure does not show the executive committee so we must infer that the Board and the Executive committee function together in some way but it is not at all clear how this happens. The 2014 report tells us:
"The Board itself has evolved substantially over the past two years
from its historical structure of broadly balanced Executive and
Non-executive representation to its current shape of the Chief
Executive and Chief Financial Officer being the only Executive
members of the Board. It is important to view these changes in the
context of management development generally and in particular
the development of a strong Executive Committee under Philip
Clarke, the individual members of which generally attend Board
discussions of matters reflecting their responsibilities. This allows
the Board to operate as a smaller group, supporting real, robust
and penetrating debate while ensuring continued contact with a
range of senior business executives."
Let's think about this in the historical context. Among the concerns that prompted Cadbury was the negative influence of dominant chief executives and many of the measures that have followed have been designed to deal with this apparent problem. (I say apparent because there may be some circumstances in which a dominant CEO may be just what is needed but let's ignore that.) But in Tesco's structure the link between the two committees rests in the hands of the CEO and the CFO who sit on both (the company secretary does, too, perhaps we shouldn't forget him.) Doesn't this potentially hand power back to the CEO?
Tesco is not alone in adopting this "evolved" board structure. When the Cadbury Committee sought to strengthen the role of NEDs, particularly through establishing audit committees, critics argued that this undermined the principle of the unitary board. But the trend to smaller boards with an emphasis on the role of independent NEDs seems to have led to a de facto two tier structure. I've never understood why this shouldn't work just as well but it's worth noting that the countries where this is the norm have different legislative and regulatory arrangements to the UK.
Secondly, Professor Willmott's criticism of Tesco's NEDs is rather unfair. With the best will in the world and even with relevant industrial and commercial experience, a bunch of part time directors is unlikely to be able to offer the rigorous oversight and constructive challenge which is now demanded of them. I'm surprised that anyone wants to take on the role these days.
Prescribing board composition to raise the level of board independence has had unintended consequences and there is little evidence that it has been effective in any regard. I very much doubt whether similar prescriptions to increase diversity will work, either. As the Tesco report also says:
"Board structure is not set in stone. At any point in time it must
reflect the requirements and state of development of the business
in order to be effective. The Tesco Board will continue to evolve to
best match the needs of the business."
Let's move away from prescription and return to the intention of the Cadbury Committee which was to enable the important conversation between boards and investors within the flexibility of the comply or explain framework. And let's also remember that boards, however independent and diverse, will still make mistakes. Not every "scandal" has its roots in corporate governance: some are just bad business decisions.
Wednesday 8 October 2014
Wednesday 1 October 2014
If women are the answer, what is the problem?
Dr Barnali Choudhury has kindly sent me a copy of her paper "New Rationales for Women on Boards", recently published in the Oxford Journal of Legal Studies. The paper is one of a very small number questioning the "business case" for women on boards and suggests not only an extended rationale but also possible ways forward to increase the number of women appointed. Dr Choudhury usefully draws on strategic management literature to consider the contribution of women to board decision-making effectiveness, demonstrating that this depends on task performance and cohesiveness.
With regard to the latter, she acknowledges the potential problem of groupthink but I think this deserves much deeper analysis. The level of constructive challenge that is most useful for a board is likely to change with changing circumstances both internally and external to the company and the contribution of board diversity to constructive challenge is far from clear. Further, discussions of board effectiveness rarely address the criteria for assessing effectiveness in the context of board objectives.
Dr Choudhury proposes legislation along the lines of the US football Rooney Rule, which would ensure that women were interviewed for every board position. She addresses the issue of enforcement with the proposal of an annual "audit" for companies with few women on the board, with financial sanctions. This could prompt a new strand in the board consultancy business, but it would, in my view, be better than quotas, as women appointed in this way would have the opportunity to compete equally without the fear that they have been favoured because of their gender, reflected in the "golden skirts" phenomenon. However, she also highlights the supply issue in business leadership, particularly the existing "job success model":
"Positions of leadership in business tend to be achieved through a model in which unfailing availability and total geographical mobility at all times is required in addition to a linear
career path with no breaks."
This is an interesting paper and a thoughtful and important contribution to the debate about board gender diversity, the type of approach I called for in my blog post a year ago. But I am still not convinced about the fundamental nature of the issue. Is there really a problem with corporate board composition that can be solved by appointing more women?
In setting out the "equality rationale", Dr Choudhury asserts that
"... even if a correlation cannot be found between women on boards and shareholder maximization, an equality rationale still justifies measures to promote women on boards. In this light, an equality rationale can be seen as emphasizing women’s rights—as opposed to business reform—as the focus of the government’s measures. In short, increased female representation on boards is valued in its own right."
While agreeing that the factors in our social and institutional environment which inhibit female participation in leadership of all types need to be addressed, I'm still not convinced that getting more women onto corporate boards is a good way of doing this. There is much discussion of the "pipeline", through which female senior managers can achieve board level posts, but I have yet to see much evidence of a trickle down effect resulting in better opportunities for women after such appointments are made. Governmental action would be more usefully directed towards measures to offer all women (and other diverse groups) opportunities for achievement within our social system, rather than focusing on the relatively small group who aspire to board appointments.
There is little evidence that prescribing board composition has positive effects. The process by which directors are appointed to boards depends on shareholders and nomination committees: let them get on with it as they see fit.
With regard to the latter, she acknowledges the potential problem of groupthink but I think this deserves much deeper analysis. The level of constructive challenge that is most useful for a board is likely to change with changing circumstances both internally and external to the company and the contribution of board diversity to constructive challenge is far from clear. Further, discussions of board effectiveness rarely address the criteria for assessing effectiveness in the context of board objectives.
Dr Choudhury proposes legislation along the lines of the US football Rooney Rule, which would ensure that women were interviewed for every board position. She addresses the issue of enforcement with the proposal of an annual "audit" for companies with few women on the board, with financial sanctions. This could prompt a new strand in the board consultancy business, but it would, in my view, be better than quotas, as women appointed in this way would have the opportunity to compete equally without the fear that they have been favoured because of their gender, reflected in the "golden skirts" phenomenon. However, she also highlights the supply issue in business leadership, particularly the existing "job success model":
"Positions of leadership in business tend to be achieved through a model in which unfailing availability and total geographical mobility at all times is required in addition to a linear
career path with no breaks."
This is an interesting paper and a thoughtful and important contribution to the debate about board gender diversity, the type of approach I called for in my blog post a year ago. But I am still not convinced about the fundamental nature of the issue. Is there really a problem with corporate board composition that can be solved by appointing more women?
In setting out the "equality rationale", Dr Choudhury asserts that
"... even if a correlation cannot be found between women on boards and shareholder maximization, an equality rationale still justifies measures to promote women on boards. In this light, an equality rationale can be seen as emphasizing women’s rights—as opposed to business reform—as the focus of the government’s measures. In short, increased female representation on boards is valued in its own right."
While agreeing that the factors in our social and institutional environment which inhibit female participation in leadership of all types need to be addressed, I'm still not convinced that getting more women onto corporate boards is a good way of doing this. There is much discussion of the "pipeline", through which female senior managers can achieve board level posts, but I have yet to see much evidence of a trickle down effect resulting in better opportunities for women after such appointments are made. Governmental action would be more usefully directed towards measures to offer all women (and other diverse groups) opportunities for achievement within our social system, rather than focusing on the relatively small group who aspire to board appointments.
There is little evidence that prescribing board composition has positive effects. The process by which directors are appointed to boards depends on shareholders and nomination committees: let them get on with it as they see fit.
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