We’ve seen some spectacular large-scale failures of corporate governance over the last decade or so including Enron, Northern Rock, RBS, Olympus and Kodak – to name a few. There have been the inevitable responses to those failures with a series of high profile reports (Cadbury, Higgs, Walker) which made recommendations to improve corporate governance.
The latest version of the Financial Reporting Council’s Corporate Governance Code incorporates many of these recommendations. Its purpose is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. So far so good, but the code only applies to listed companies.
The majority of UK companies are unlisted which means that they are not bound by the code. That’s a shame; some have gone further and said it’s a sham – or words to that effect. To be honest, they have a point. One of the requirements of the code is to evaluate the performance of the board each year and to have this facilitated externally at least every three years. Predictably some boards have questioned the need to review their performance.
Rather than asking why they should evaluate their performance, perhaps they might have considered why they should not conduct a board evaluation? That’s immaterial now as the third year of the 2010 code has arrived, which means that the listed laggards have to comply or explain why they have not conducted an externally facilitated board evaluation in the annual reports. They are likely to comply, albeit reluctantly, in order to pacify institutional investors.
But what about SMEs? Although they have more room to manoeuvre than listed companies, the directors still have a set of onerous personal responsibilities defined by the Companies Act of 2006. And if they get things horribly wrong, action can be taken against directors by the company, the Crown, regulators and shareholders. The consequences can include dismissal, fines, imprisonment and disqualification.
So why wouldn’t boards of smaller companies evaluate their performance? After all they almost certainly consider it good practice to evaluate the performance of their management teams. Well, some SMEs certainly are adopting this good practice by putting the board through a periodic MoT, but I suspect that others will either wait to be compelled by legislation or end up falling by the wayside. Let’s hope not.