Carillion and NEDs

 As the aftermath of Carillion begins to unwind, it is inevitable that concerns will be raised about the company’s corporate governance.  Among news reports on Monday, I heard the BBC’s attempt to talk to Baroness Sally Morgan: she said that as she had only been on the board since last July she wasn’t the person to talk to.

Now, I wouldn’t want to be put on the spot by a reporter in those circumstances but she is the senior independent director, a significant role. And she’s had six months to get used to it. Six very turbulent months, if reports are to be believed. I’m a little surprised that she hadn’t got her ducks in a row for the possibility of this outcome for the company.

The other female NED is Alison Horner who is also head of HR at Tesco. I’d have thought that job would be quite enough for anyone without the added workload of a NED post on a huge complex company in a completely different sector.

I think this raises an important question which, as far as I know, has never been researched: why do people seek NED appointments? The expectations placed on NEDs in the UK corporate governance regime are very high and, I have always thought, impossible to achieve.

When I interviewed audit committee chairs in FTSE 100 companies for my PhD research back in the 1990s, two of my interviewees were also FTSE 100 finance directors (when  did we start calling them Chief Finance Officers? And why?).

One explained that the chairman of his company had encouraged him to seek a NED appointment: he found it quite challenging in terms of time but saw a major advantage for his company in the information he was able to gather about how other companies grappled with similar problems to those he faced in his FD role.

The other FD held several NED appointments: he told me that he did this for intellectual stimulation and so that other companies could benefit from his extensive experience and it wasn’t that much of a challenge as he had his FD role running very smoothly and well under control (as it happens, that company disappeared not long after I talked to him…).

I once asked Adrian Cadbury why his committee set such store by NEDs, when there was already evidence from the US that they had difficulty in performing the oversight role assigned to them. With a twinkle in his eye, he first told me that that was the one thing that the committee could agree on … but then he explained his firm conviction, based on his own experience, that boosting the NED role would improve corporate governance.

That may well have been the case in the business environment of the late 1990s when boards included more executive directors than now and when there was a good supply of potential NEDs like Adrian: of sharp intellect, with many years of experience on boards and a strong belief in the public interest role of the public company. That generation is no longer with us: such men are few and far between these days.

Yes, they were men. It would be even more interesting to know why women accept NED appointments. Today they are greatly sought after, since appointing female NEDs is a quick way to satisfy demands for board gender diversity. But we’re told that the pool of available candidates is still small because the pipeline through to senior executive appointments is still slow, so I wonder about the pressure this then places on the women in that pool. And are they the first choice of headhunters? An inability to recruit NEDs would be a powerful signal of corporate problems…

A better way to increase board gender diversity could be to enlarge boards and to bring back the members of the executive group to main board membership. This would also ensure that NEDs sit around the same table as senior executives. At the moment, it is unclear how such interaction takes place. If contact between the board and the executive group is mediated through the CEO, this surely undermines an important purpose of UK corporate governance arrangements. which were originally intended to boost the oversight function of NEDs and curb management power.